After a less than impressive first day of trading on Friday, shares in the social networking site Facebook have dropped below their original $38 price. Has the bubble already burst?
He may have just got married – but Facebook founder Mark Zuckerberg just lost $2bn in a matter of minutes as his company’s shares went into freefall. It is not good news, either, for the millions of small investors who were caught up in Friday’s frenzy.
Facebook’s shares originally dropped more than 13 per cent in early trading in New York, as 30 million shares changed hands: at the last estimate, the price was down some 8 per cent to $35 a share, well below the $38 initial public offering.
When the company floated on the Nasdaq on Friday, amid huge anticipation, it raised some $16bn. But the opening “pop” that the market was hoping for never came. The small initial rise quickly evaporated, leaving shares hovering close to their opening price.
Banks, led by the chief underwriter Morgan Stanley, hastily stepped in to keep the price from dropping still further, although Morgan Stanley has not officially confirmed or denied their role. But it was widely assumed they would be unwilling to take any extra risks, and this morning the underwriters were not buying in bulk.
One problem with Friday’s IPO was a technological glitch at Nasdaq itself which delayed opening trades, because some investors did not know whether their orders to buy or sell had actually gone through. Nasdaq’s chief executive Bob Griefeld admitted “this was not our finest hour”, and the Securities Exchange Commission is now investigating what happened.
But other experts say Facebook was simply priced too high, which along with the sheer volume – a record 556 million shares up for sale – left them vulnerable to the capricities of the market. In a research note, BTIG analyst Richard Greenfeld concluded: “We find Facebook’s current valuation unappealing,” going on to say that valuing the company at this stage was “more art than science”.
The financial website Business Insider summed up the general downbeat view: “Adding insult to injury, futures are nicely up this morning, so the mood is generally positive. But people don’t want Facebook. Wow!”
Shares in other social media sites have already been dragged down. The games development firm Zynga was down more than 5 per cent, while the discount site Groupon and the business network LinkedIn also dropped in value.
For Mark Zuckerberg and his fellow Facebook executives, the task now is to convince investors that they can generate meaningful revenue in future: profits to match the ambitious share price set at 54 times next year’s projected earnings. It is already clear that underwriters will only support the price so far. The rest, is up to Facebook.