7th UPDATE: Facebook Falls 11%, Closes Below $38/Share IPO Price
05/21/2012| 05:10pm US/Eastern
--Facebook shares close below IPO price of $38
--Company's market cap falls below $100 billion
--Facebook CEO Zuckerberg suffers $2.1 billion of paper losses
(Updates throughout with closing stock quotes and figures.)
By Drew FitzGerald and Matt Jarzemsky
Facebook Inc. (FB) shares fell 11% Monday, dropping well below their initial public offering price of $38 on just their second day of trading, a black eye for all those involved with the social networking company going public.
Shares of the social media giant closed at $34.03 after sliding as low as $33 during the session. Based on that price, the company is now valued at $93.24 billion, below the $104 billion it was worth at the time of the IPO. Facebook shares need to hit $36.50 for the market cap to go above $100 billion again.
Falling below the offer price so quickly is considered disappointing for a new stock, especially for the most heavily traded IPO of all time. The reasons cited for the decline include an overly aggressive IPO price, an increased number of shares offered and concerns about Facebook's slowing revenue growth.
"The underwriters completely screwed this up," said Michael Pachter, analyst at Wedbush Securities. "This thing should have been half as big as it was, and it would have closed at $45."
A spokesman for Morgan Stanley (>> Morgan Stanley), the IPO's lead underwriter, declined to comment.
While investor enthusiasm early on was high for Facebook shares, the company's more than $100 billion valuation troubled some analysts.
"Facebook's IPO priced at a level well above where we foresaw compelling 12-month returns," BTIG analyst Richard Greenfield said in a research note Monday. With revenue and earnings growth decelerating in 2012, "we find Facebook's current valuation unappealing."
The drop Monday dealt Facebook Chairman and Chief Executive Mark Zuckerberg about $2.1 billion of paper losses, though his stake was still worth more than $17 billion Monday morning. The social network's founder also retains almost 56% of Facebook's voting power.
The slump is likely to turn up the heat on Facebook to boost its performance by generating more revenue from its massive user base, which includes more than 900 million active users. The company's latest first-quarter earnings slipped 12% amid surging expenses.
Revenue actually fell compared with the fourth quarter, a decline the company blamed on "seasonal trends" in the advertising business and growth in markets where Facebook generates less revenue per user, according to a regulatory filing last month.
Rob Enderle, a principal analyst at San Jose Calif.-based Enderle Group, said Facebook's earnings and revenue don't justify the high price of its stock.
"The insiders made a ton of cash, but the investors who are probably Facebook users lost a lot of money, and it's going to affect their impression of the company," he said. Enderle added that he targets a "conservative" price between $18 and $20 based on the company's earnings and risk.
On Friday, Facebook's shares repeatedly tested the $38 level, but Morgan Stanley reportedly moved to prop up Facebook's stock Friday. Dave Lutz, managing director at Stifel Nicolaus, said Facebook's underwriters might have stopped supporting the stock's price to thwart short-term traders counting on the underwriters buying at $38.
"We think this could just be a technique of Morgan Stanley trying to shake out some of the weaker hands," Lutz said. Facebook shares are now down 24% from their high of $45 Friday.
The disappointing IPO also has dragged down other newly issued online stocks Friday, such as Zynga Inc. (ZNGA), LinkedIn Corp. (>> Linkedin Corporation), Groupon Inc. (>> Groupon Inc) and Pandora Media Inc. (P).
On Monday, Zynga fell 1% to $7.09, while LinkedIn declined 2.2% to $96.84. Groupon rebounded, jumping 7% to $12.39, and Pandora climbed 3.1% to $10.07.
Also, GSV Capital Corp. (>> GSV Capital Corp), a Woodside, Calif.-based fund that invests in venture-backed private companies, posted big declines. GSV has invested in Facebook, Groupon and Zynga, as well as the social-networking company Twitter Inc. GSV fell 9.8% to $11.86.
Many not participating in Facebook's IPO are relieved to be on the sidelines.
"It's gonna be a very bumpy ride, but I don't think this stock even in the $30s makes sense," said Jeff Sica, head of Morristown, N.J.-based SICA Wealth Management, who steered clear of the IPO. "People decided just not to buy into all the hype."
Sica said he grew wary of the stock after an institutional investor he wouldn't name seemed too eager to offer his firm shares ahead of Facebook's Friday debut.
Adam Sarhan, head of New York-based fund Sarhan Capital, said, "From my standpoint, I'm very happy not to be involved."
-By Drew FitzGerald and Matt Jarzemsky, Dow Jones Newswires; 212-416-2909; Andrew.FitzGerald@dowjones.com