The Facebook IPO Stock Price Decline
and its Aftermath. What Happened and
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Is the Facebook stock price decline after the IPO an
indication of a problem? Or are price increases or
declines after an IPO random and just part of the IPO
risks an investor takes? We’ll take a look here.

On May 21st, the second day after stock issuance,
Facebook's shares nose-dived. With this have come
complaints by investors that they were manipulated or
misled by the company and their underwriters – that they
were led to the trough of false expectations. Is this in large
part just the disappointment in a random negative
outcome? Some of these investors are used to the
immediate normal positive bias outcome for most IPOs. Is it
just sour grapes here, or was there really any difference
between the Facebook deal and others?

The stock was issued at $38.0 on May 18th and the
closing price was $38.2 after peaking intraday at $45.0.  
This represented a total valuation $85 billion. Not that bad
despite some technical ordering glitches. The problems
started the next day, as the stock closed down $4.02 to
$34.0. Its low point since then was $25.9 on June 5th.  It is
currently around $32.00 ($71.6B total valuation) after just
over one month on the market.  

So the Facebook investors haven’t done well up till now.
But this is not typical. Numerous studies have shown first
day positive gains for IPOs.  One long term study of the
past thirty years showed first day gains on IPO stocks to
be 18% on average. Based on the first day end price
Facebook investors fell well short on this count.  Other
studies have also shown that, on average, the long term
performance of these companies, adjusted for risk, lags
the market as a whole. That statistic should be sobering
for current FB investors as well.

stocks from 4th qtr 2011 through 1st qtr 2012, the average
price change of the 50 stocks from their IPO issue price to
the end of the first quarter 2012 was 27.5%, while the
average change from their opening price to date is 15.9%
Recent history is generally consistent with this: For IPO
(This is the gain that someone buying in the open market
on the first day would have experienced). Over the
average period within this six month period  the average
stock gained 11.3%. So the IPOs performed 5% better, or
there was a 5% initial “bump” over opening price during
just this period for the IPOs over the average stock in the
market. There was approximately a 16% bump for those
insiders who got the stock at issue price.

Of course these are just averages, and there are many
stocks whose performance will fall below this average.
Facebook is certainly one of them so far.

It seems apparent, that there were two courses of
thought/action being followed simultaneously by investors.
One followed by the majority of institutional investors, was
that the deal/price was too rich. That in trying to sell this
deal at 20 times revenue and 100 times earnings it was
clearly overpriced. This was in the face of slowing revenue
and traffic growth. This growth, although still impressive at
64 % for revenue, is nonetheless significantly slowing
down, as compare to 88% last year and 40% estimated
next year.  Traffic growth was only 5% this year, April 2012
over April 2011. This trajectory is not currently what it
needs to be to reach ultimate earnings of $5 billon in 7-10
years – that’s the ultimate terminal annual amount to justify
$100B valuation now (at a minimum).

"Investors are increasingly aware of the risk embedded in
the stock price. There are real concerns about growth and
advertisers' frequent lack of certainty how best to use
Facebook, along with rising costs and ongoing acquisition
risk," said Brian Wieser at Pivotal Research Group, who
has a $30 target on the stock.

There is another group of investors, whose risk profile
tends more towards speculation, that wanted to own this
stock at any price. They fueled the initial frenzy, the one
that caused the underwriters to increase the number of
shares from 321 million to 421 million, and to increase the
initial price range from $25-$32 to $34 to $38. As it turns
out today, they should have stuck with the first estimate, as
that is right around where the stock price is right now.  

Click here to go to Part Two of the Facebook IPO Stock
Price Decline and its Aftermath.

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