Why Facebook fell flat on its face after Nasdaq listing

by George Albert

It fell flat on its face on Day One. Facebook, the social networking site that had caught the market’s imagination with its huge initial public offering (IPO), has disappointed many with its trading debut.

Facebook (symbol: FB) closed trading on Friday near its IPO price. The price would have gone below the offering price had not the underwriters - JP Morgan and Morgan Stanley - stepped in to buy when FB hit the offering price.

The IPO was priced at $38 and the stock began trading a couple of hours after the market opened. After opening modestly higher at $42 the stock ran up to $45 and fell in the first 30 minutes of trading to its offer price of $38. The stock then traded between $38 and $42 during the day to close at $38.18.

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 Compared to LinkedIn (symbol: LNKD), the other networking site, Facebook has performed dismally on its first day. On 19 May 2011, almost a year before the Facebook debut, LinkedIn priced its shares at $45. LNKD opened at $85 the next day and has never touched it’s IPO price.

Trading volumes were huge on Facebook with a tremendous amount of buying and selling. A total of 571 million shares changed hands and in the first hour of trading nearly 200 million shares where traded. Remember that trading began two hours after the market opened. A full day of trading would have seen a much higher volume.

Compared to Facebook, LinkedIn only traded 8.6 million shares on its first day. To put the public’s interest in Facebook’s stock into perspective, we should look at the largest traded stock and exchange traded fund in the world. The three-month average daily volume of the most recent largest traded stock, Bank of America, is 245 million and that of SPY, the exchange traded fund of the S&P 500 index, is 150 million.

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There was a lot of interest in Facebook shares from retail investors. Online brokerages reported huge orders to buy the stock early in the morning before the markets opened. However, the buying interest was overwhelmed by sellers and perhaps traders who executed multiple trades during the day.

Another note on the trading of Facebook is that there were some technical difficulties at Nasdaq due to which some orders were not executed. It’s not clear if this had any effect on prices, but the trades were smooth later in the day.

So does Friday’s price action say anything about the future of Facebook stock? It’s too early to tell as far as chartists go. They need more price action before a trend can be identified. However, one good thing is the commitment shown by the underwriters to keep the stock above the IPO price. Also the performance of recent IPOs has been mixed, making it difficult to draw any parallels for Facebook.

While LinkedIn did well, shares of Groupon Inc have not done well. Priced at $20, the IPO was floated in early November 2011. On the first day prices rallied to $31.14, but it has been on the downtrend ever since, and closed at $11.58 on Friday. Another IPO of Zynga Inc, an online games maker, dropped nearly 13 percent from its IPO price of $10 on the first day of trading on 16 December. It did rally to $16 in March but is now trading lower than its IPO price at $7.16.

Given the lack of historic price action to technically analyse Facebook, one has to go by fundamentals. The company is trying to create a new way of advertising to generate revenues and unless that model clicks the shares of Facebook will be under pressure. For instance, General Motors recently decided to stop advertising on Facebook as it was not effective. If more advertisers pull out, it will be bad news for Facebook.

But Facebook has a large and committed following of users, which advertisers would like to reach. The company is also able to effectively segment its users making it easy to target advertising. But users can be fickle and can move to the next best thing. Remember MySpace?