The stock market did turn out to be a voting machine on Facebook on Friday (to quote Warren Buffett and Benjamin Graham), and the vote was thumbs-down on flapdoodle.
Market pros will be debating the lessons to be drawn from the disappointing first-day trading in Facebook’s initial public offering. But one lesson is that when given enough information, investors can find their way through fogbanks of hype.
When a stock offering is as closely followed as Facebook’s, it’s much more likely that the shares will be fully valued than that they’ll harbor hidden treasure. Facebook went public at $38 a share, and after a day of epically heavy trading, closed at $38.23, for a gain of 0.61 percent. Not quite the huge pop market mavens were predicting.
The expected pattern is that public investors – “dumb money” in Wall Street regard – react more to hype than to fundamentals. That’s why savvy Wall Street traders take it as a bearish signal when small investors pile into a stock or the stock market.
This time, the expected frenzy didn’t materialize. What accounts for the disappointing showing? A few things come to mind. Among the downsides of becoming a public company is that your dirty laundry gets a public airing. In the run-up to the IPO, Facebook’s linens were out on the clothesline for all to see.
There was broad coverage of the company’s slowing growth and its difficulty in placing advertising on mobile devices, through which more than half its users access the website. It didn’t help that General Motors announced just days before the offering date that it was withdrawing all its paid advertising from Facebook because of doubts that the site is an effective advertising medium.
Wall Street prognosticators dismissed some negative leading indicators for the Facebook IPO, including news that institutional insiders such as Goldman Sachs had increased the number of shares they would sell into the IPO, and that allocations of shares to brokerages to push to their clients were also increased at the last minute. Normally, these are signs that interest is lagging, but many on the street figured the public excitement would prevail.
Facebook may yet be overpriced. Morgan Stanley and its fellow underwriters of the IPO undoubtedly spent millions of dollars, maybe hundreds of millions, propping up the stock Friday so it wouldn’t fall below the $38 offering price, as that would have been a huge embarrassment. No one knows how long they’ll continue to do so.
Additionally, in about a week the shares become eligible for short-selling, which could place more pressure on the price. A few months from now, insiders prohibited from selling their own share will have the green light, and millions more shares will enter the marketplace. The question in coming weeks may no longer be how high Facebook can soar, but how low can it go?
EYE OF THE HURRICANE
Facebook Chief Executive Officer Mark Zuckerberg sent a message to newly wealthy employees of the largest social-networking service on the day of its delayed stock-market debut: “Stay focused” and “keep hacking.”
The words were emblazoned on T-shirts handed out during a gathering of more than 2,000 people at the company’s Menlo Park, Calif., headquarters, said a person who attended and asked not to be identified because the event was private. They were there to watch Zuckerberg mark the opening of trading on the Nasdaq Stock Market – an event set back after Nasdaq failed to deliver trade-execution messages.
Facebook employees, including Zuckerberg, had only recently emerged from a “hackathon,” which drew together programmers working all night crafting code that might become the foundation for a new Facebook feature or application.
Throughout the night, staffers drank keg beer and ate pizza and chicken wings while building new apps, a person familiar with the festivities said. One group organized an impromptu foot race to In-N-Out Burger, a fast-food chain more than six miles away, while others lined up to wait for a campus coffee shop to hold its grand opening at 5 a.m.
By morning, television camera crews filled the parking lot outside while three news helicopters buzzed overhead. Zuckerberg was introduced to a throng of workers by Greifeld, who presented him with a Nasdaq-branded hooded sweatshirt.
For many seeking a big first-day pop in Facebook’s share price, the single-digit increase was somewhat of a letdown.
“This is like kissing your sister,” said John Fitzgibbon, founder of IPO Scoop, a research firm. “With all the drumbeats and hype, I don’t think there’ll be barroom bragging tonight.”
The small jump in price could be seen as an indication that Facebook and the investment banks that arranged the IPO priced the stock in an appropriate range.
And it was good for ordinary investors, who are often shut out of IPOs or buy the stock at a high price on day one.
Facebook offered 15 percent of its available stock in the IPO, so there was enough to meet demand. In comparison, Google offered just 7.2 percent of its stock when it went public in 2004 – and rose 18 percent on day one.
HOW THE DAY UNFOLDED
9:33 a.m., Wearing his trademark hoodie and standing before a huge crowd in Menlo Park, Calif., CEO Mark Zuckerberg symbolically opens trading on the Nasdaq Stock Market. Facebook stock won’t begin trading until later in the morning. His opening statement: “Right now this all seems like a big deal. Going public is an important milestone in our history. But here’s the thing: Our mission isn’t to be a public company. Our mission is to make the world more open and connected. In the past eight years, all of you out there have built the largest community in the history of the world. You’ve done amazing things that we never would have dreamed of, and I can’t wait to see what you guys all do going forward.”
10:30 a.m., Facebook’s IPO is trending on Twitter, but it is not the No. 1 item. God, a retiring Chicago Cubs pitcher, Kanye West’s new film and Haitian Flag Day all were trending higher.
11:07 a.m. People huddle outside the windows of the Nasdaq site in Times Square, waiting for the stock to open. People are holding up cellphones and cameras pointed at the Nasdaq board, waiting to get a picture of the first price change.
11:32 a.m., Facebook stock opens at $42.05. Seven minutes later, the stock is hovering at about $40.
11:47 a.m., The price drifts back toward the offering price and is now at about $39.
12:05 p.m., Wall Street Journal tweets “Make no mistake, this is a big disappointment,” on Facebook IPO.
12:17 p.m., In a surprise turn, Yahoo stock goes up more than 5 percent, on a report that the company is close to selling part of its valuable stake in the Chinese Internet company Alibaba Group.
12:19 p.m., Other social media stocks begin to take hits: LinkedIn: Down 2.2 percent. Groupon: Down 6 percent. Zynga: Down 13 percent, and apparently halted 40 minutes ago.
12:24 p.m., More than a quarter-billion Facebook shares have been traded.
12:50 p.m., Facebook is trading at about $40.50, or $2.50 higher than its offering price.
4 p.m., Facebook closes at $38.23. All that excitement for a gain of – 23 cents from initial IPO listing Thursday evening. And it took a rush of buyers in the final minutes to achieve even that. Facebook was hugging the $38 mark for much of the final hour of trading.
Michael Hiltzik of Los Angeles Times, Brian Womack and Douglas MacMillan of Bloomberg News and Barbara Ortutay of The Associated Press contributed to this report.
Sources: The Associated Press, McClatchy News Services, staff report