Facebook stock fizzle blamed on pricing

Facebook Inc’s underwhelming debut on Wall Street has increased pressure on the social networking giant to deliver stellar growth.

Facebook shares fell 11 per cent on Monday, the company’s second day as a publicly traded company, due to what many analysts and investors blamed on overly aggressive pricing by Facebook’s underwriters, as well as a decision to expand the size of the offering by 25 per cent.

The poor stock market performance has intensified the scrutiny of Facebook’s business, raising the bar for the company
to regain Wall Street’s confidence, say some investors and analysts.

Facebook’s stock closed Monday at $34.03, down 11 percent from Friday’s closing price of $38.23. The investment
banks that arranged Facebook’s offering set a price of $38 on Thursday.

Although many investors had hoped for a big first-day pop, Facebook’s stock opened Friday at $42.05 and fluctuated between $45 and $38 throughout the day.

The company has lost nearly $10bn of its market value, and is now worth about $96bn.

“At $38 it was clearly priced for perfection, ignoring the risks or not embedding them in the value of the price that the stock was put out to the market,” said Brian Wieser, an analyst at Pivotal Research Group who was first to come out with a ‘sell’ rating on Facebook’s stock on Friday.

Delicate game

Initial public offerings are a delicate game of supply and demand. The investment banks orchestrating the transaction, the deal’s underwriters, work with the company to decide how much stock to sell and at what price.

Investors and technology industry watchers are closely tracking the Menlo Park, California-based company’s shares. Facebook’s initial public stock offering was one of the most anticipated ever, and now serves as a bellwether for other social media companies.

Facebook generated $3.7bn in revenue in 2011, with net income of $1bn – a sharp contrast to some of the money-losing Web companies such as Groupon Inc and Pandora Media Inc, that have recently gone public.

But Facebook’s revenue growth has been slowing in recent quarters, raising flags among some investors who believe a
company such as Facebook should be delivering consistently strong revenue growth at this stage in its life.

“Wall Street is a severe task master and they’re going to want to see quarterly results, then guidance, then subsequently
they’re going to want to see that guidance beaten, and then the guidance raised,” said David Rolfe, chief investment officer of Wedgewood Partners.

“Either they deliver those results and make folks happy, or they’re going to see another element of Wall Street, that ‘Hey,
when you have a richly valued stock you must deliver, or the stock’s going to correct and correct hard,'” said Rolfe.