This was the most talked about IPO of all the time. Enough
buzz was created. Share prices were revalued and were raised. Street had lot of
expectations from this IPO. This IPO was expected to be as successful as other big
and much talked IPOs from Palo Alto. World’s youngest billionaire was set to
get real rich. This IPO was going to prove that a college dropout wearing a
hoody and having an idea in mind was right. The site had thus far managed to
change the social media experience dramatically. With 900 million users from
all over the world, the IPO was The Most Happening
Thing around. So with a lot of buzz and excitement issue was opened and not
to anyone’s surprise was oversubscribed.
On 18th May, Facebook was going to be listed on NASDAQ.
Usually trading for newly listed stocks starts a bit late than normal after the
bell which is around 11’o clock, but in this case trading didn’t start till
11.30 due to technical glitch. Once listed Facebook managed to touch $ only to
close at $38.23 mere 23 cents up from its initial price. Since then the stock
has lost around 18 %.Investors are going mad over many issues. So what caused
all this? Where did the IPO which was supposed to be a hit, failed instead?
There are many issues that contributed to the Facebook Fiasco
such as -
- General Motors Announcement
Couple of days before the Facebook was set to get listed on NASDAQ,
General Motors one of the world’s largest automobile manufacturers dropped a
bomb saying that it’s pulling out ads from Facebook worth $10 million as Facebook
Paid Advertisements are not proving to be beneficial for the company. Though
the amount is not that big it certainly created a negative sentiment about Facebook
as GM is one of the biggest automobile companies around the world. Investors
feared that other companies may follow GM’s path and withdraw ads which could
affect the earnings.
- Underwriters’ Effect
Generally stocks of the hyped and much talked IPOs shoot up
on the first day itself which allows investors to earn some extra money. In
case of Facebook the stock did manage to jump but for a short duration which didn’t
help small and medium investors in any way. So what was the reason behind this short
run?
The reason was the earnings estimate of the Facebook which
was revised by the underwriters and they had cut the estimated because Facebook
had given them information about how business outlook was not looking so good.
When this all was happening the worst thing was that this information was not
being conveyed to the retail investors. Only large investors had this info
through underwriters. Which made Retail Investors angry leading to filing
lawsuits.
- NASDAQ Glitch
Whenever a new stock is listed on NASDAQ after the bell
usually trading starts at 11’o clock. But in case of Facebook the trading didn’t
start till 11.30.The reason behind this is said to be the technical glitch.
Facebook being the most talked IPO ever was the hottest stock. Everybody wanted
to have a piece of it. Huge orders were expected and were being placed. The
orders were so huge that NASDAQ system couldn’t withstand the load and crashed!
After trying to resolve the issue NASDAQ decided to run on
an alternate system. This problem caused the delay in trading. Also due to the
system glitch many orders were not confirmed, traders had problems in
cancelling orders and lost control over trading platform.
- Retail Investor Consensus
Majority of Retail Investors were not able to get their
hands on the stock on the first day and next few days. So most of them are
going for ‘wait and watch’ approach to assess the stock.
Facebook has managed
to grow at a significant rate over the past few years. The main Revenue
generation source for Facebook has always been advertisements. But according to
the recent reports launched by the Facebook no. of mobile users have grown and
soon will be dominant. Facebook advertisements are designed for desktop of Full
Site usage, for Mobile sites Facebook has still not developed any platform. So
it is unclear how Facebook will be generating the revenue when mobile users
will dominate the userbase.
And let’s face it Facebook is Overvalued; it has to get the
price –earnings ratio right to win investors’ confidence. Investors are being
cautious about this IPO as out of 19 social media IPOs in 2011, 16 are trading
below offer price.
This all affects the investor thinking process and decision
making process forcing them to take cautious approach. So at least for next few
days the stock will remain in the hands of larger investors till retail
investor’s gain confidence in the stock.
So what next for Facebook?
Facebook story isn’t over yet. Every organization at some
point of time comes across such situation where they have to Re-invent their
business strategy. Facebook is currently at that stage. Increase in mobile
application userbase indicates the urgency to invent the right platform for
mobile advertisement. Also, revenue generation only through Advertisement model
needs some changes. Facebook has to find an alternate source of revenue
generation without breaking ‘Free and Always will be’ promise. Also being a
public listed company Facebook will now face pressure from investors to get the
good results.
Facebook has always been changing. It’s an organization which
takes ‘Change is Inevitable’ seriously and due to which it has managed to keep
users interested into their site. Now with funds from IPO to get the best
talent and services, Facebook will again prove that it can adapt and sustain in
any challenging environment.