Facebook's stock closed at $31.00 today, down over 18% from its IPO price of $38.00 per share, and down 26% from the opening price of $42.05 on the first day of trading. Much has already been written about the IPO and what went wrong, but most articles have focused on narrow reasons. What follows is a more comprehensive analysis:
Pre-IPO Trading on Secondary Markets. Before its IPO, Facebook was very actively traded on private secondary markets, namely SecondMarket and SharesPost. What this means is that people who would have normally bought shares in the IPO or on the first day of trading didn't do so, which means lesser demand for the stock in the after-market. While this alone wouldn't account for the IPO performance, it could certainly have contributed.
Facebook Operating Performance. During the run-up to the roadshow, Facebook filed an amended registration statement indicating that revenue growth and ad sales growth had slowed. In addition, during the roadshow, General Motors announced that it was pulling its advertising from Facebook, which gave the company some bad press right before the IPO. Now it is being reported that certain analysts lowered their estimates for Facebook's future performance during the roadshow. What all this means is that the exuberance that would normally accompany a marquee IPO could have been dampened by the bad press surrounding these issues.
IPO Pricing. Facebook initially indicated an IPO pricing range of $28 to $35 per share, which was then raised to a range of $34 to $38 per share, and ultimately priced at the top of the amended range. This means there was strong demand at the lower range and enough to justify raising the range. But a couple of days before the IPO pricing, Facebook also increased the number of shares being offered by 25%. Some reports suggest that many retail accounts ended up with more shares than they wanted, and they may have moved to sell some of the excess shares on the first day of trading. All in all, the IPO was priced at the high end of the amended range, and expanded by 25%. This could have contributed to a feeling that the stock was fully priced and so may have minimized the upside. Still, the stock did open at $42.05 for an 11% pop, but then fell like a rock. The combination of the high IPO and that the extra supply of shares in the IPO may have contributed to the overall performance.
Nasdaq Glitches. Nasdaq had problems with their system that led to a delayed opening for Facebook and confusion surrounding trades. These problems could have caused concern on the part of traders, and concern and confusion certainly can't be good on the first day of trading.
Bad Press. During the entire IPO process, Facebook was hounded with articles about its valuation. All of this bad press could have muted the retail demand that normally would have purchased shares in the aftermarket.
Difficult Market and IPO Environment. On the days before Facebook's IPO, markets were having a difficult time. Nasdaq was falling and volatility (measured by VIX) was rising. Bad news about Europe's financial and economic crisis were all the headlines. It is difficult to take a company public with declining markets and rising volatility.
Conclusion. In my view, all of the above contributed to Facebook's stock price decline after its IPO. I will be curious to see where the stock price levels out and where the stock price is at the 6 month period. That's when the dust will have settled to a point when we can really evaluate the IPO.
Pre-IPO Trading on Secondary Markets. Before its IPO, Facebook was very actively traded on private secondary markets, namely SecondMarket and SharesPost. What this means is that people who would have normally bought shares in the IPO or on the first day of trading didn't do so, which means lesser demand for the stock in the after-market. While this alone wouldn't account for the IPO performance, it could certainly have contributed.
Facebook Operating Performance. During the run-up to the roadshow, Facebook filed an amended registration statement indicating that revenue growth and ad sales growth had slowed. In addition, during the roadshow, General Motors announced that it was pulling its advertising from Facebook, which gave the company some bad press right before the IPO. Now it is being reported that certain analysts lowered their estimates for Facebook's future performance during the roadshow. What all this means is that the exuberance that would normally accompany a marquee IPO could have been dampened by the bad press surrounding these issues.
IPO Pricing. Facebook initially indicated an IPO pricing range of $28 to $35 per share, which was then raised to a range of $34 to $38 per share, and ultimately priced at the top of the amended range. This means there was strong demand at the lower range and enough to justify raising the range. But a couple of days before the IPO pricing, Facebook also increased the number of shares being offered by 25%. Some reports suggest that many retail accounts ended up with more shares than they wanted, and they may have moved to sell some of the excess shares on the first day of trading. All in all, the IPO was priced at the high end of the amended range, and expanded by 25%. This could have contributed to a feeling that the stock was fully priced and so may have minimized the upside. Still, the stock did open at $42.05 for an 11% pop, but then fell like a rock. The combination of the high IPO and that the extra supply of shares in the IPO may have contributed to the overall performance.
Nasdaq Glitches. Nasdaq had problems with their system that led to a delayed opening for Facebook and confusion surrounding trades. These problems could have caused concern on the part of traders, and concern and confusion certainly can't be good on the first day of trading.
Bad Press. During the entire IPO process, Facebook was hounded with articles about its valuation. All of this bad press could have muted the retail demand that normally would have purchased shares in the aftermarket.
Difficult Market and IPO Environment. On the days before Facebook's IPO, markets were having a difficult time. Nasdaq was falling and volatility (measured by VIX) was rising. Bad news about Europe's financial and economic crisis were all the headlines. It is difficult to take a company public with declining markets and rising volatility.
Conclusion. In my view, all of the above contributed to Facebook's stock price decline after its IPO. I will be curious to see where the stock price levels out and where the stock price is at the 6 month period. That's when the dust will have settled to a point when we can really evaluate the IPO.
