It was supposed to be a dream debut for the most visited site on the Internet but Facebook's Nasdaq listing on Friday turned out to be anything but that. A combination of technical glitches on the trading platform, poor investor appetite and most important of all, that old stock market trait called greed ensured that the listing turned into a flop show. But even if the stock trades well below its offer price of $38 a share now, Facebook's early investors, who include some venture capitalists, angel investors and even a Russian oligarch, are now laughing all the way to the bank. By pricing the IPO fully, the investment banks may have ensured that early investors got the maximum bang for their buck. Yet, by leaving very little on the table for new investors, the investment bankers also ensured the stock will not trade over the offer price in the near term. In a throwback to the dark days of the dot-com boom last decade, Facebook, after sensing the hype around the IPO, raised the price band from $28-35 to $34-38 a share and also increased the number of shares on offer by a quarter. It is not surprising that 60 per cent of the proceeds of the offer of $16 billion will accrue to shareholders who invested in Facebook in its early days. Of course, as those who assumed great risk in investing in an unknown company, they deserve to reap the rewards now. But should this have been at the cost of incoming investors?
The first two days of trading suggest the market is uncomfortable with Facebook's mind-boggling $104 billion valuation. The company's price-earnings ratio of 107, based on its 2011 earnings, is way ahead of the 13x that the more profitable Apple commands. The first quarter revenues and earnings also show a slowdown compared to 2011 and with General Motors recently deciding to pull out of advertising on Facebook, the concerns are real. Questions are being raised over its revenue model, which mainly relies on advertising on the site, though Facebook Credits, which it sells for applications on the site, also contribute to revenues. With about half its users accessing the site through smartphones, Facebook has to develop advertising options for them. Typically, such users find advertisements annoying on the small screen. Facebook is also experimenting in New Zealand with paid posts (NZ$2 a post) with the assurance that the recipient will surely get to see them. With petabytes of information and pictures vested with it, there is no question of the opportunity available for Facebook to leverage. How well it does that will decide whether Facebook's stock appreciates rapidly like Google's or continues to languish below the offer price.
