Facebook Stock Gets Stuck

What if someone offered a stock and no one (except company employees) bought it?  That’s what happened to Facebook in its IPO – its initial public offering. The stock went public at $38 per share and according to a TV reporter on WABC, it didn’t go very far.  He said he bought the stock at $43 per share and has been losing money ever since.

Fakebook is what the pundits are calling it.  In truth, it is quite useful for keeping in touch with one another.  Certainly the Tea Partiers are using.  Facebook pages are invaluable for sharing information and attracting new members. It’s made its co-founder Mark Zuckerberg a billionaire.

So what went wrong?

According to CNBC:  “Facebook set a record for volume on its first day of trading, but the stock otherwise failed to live up to all the hype and posted just a modest gain for the day.  After an attention-grabbing half-hour delay to start its initial public offering, Facebook shares opened at $38, surged as much as 11 percent during the day, but ultimately finished just above unchanged after hitting an intraday high of $45.

“Late in the trading day, the stock threatened to hit negative numbers, vacillating around unchanged as underwriters put up a vigorous fight to defend the breakeven point.  The lackluster performance was both a testament to good pricing and a bit of an embarrassment for a company that was supposed to wow Wall Street on its opening day. And after the market close the SEC said it would be looking into apparent hiccups in the trading execution of Facebook shares on Nasdaq.”

CNBC goes on to say, “The stock stumbled around in the opening minutes as sell-order backlogs hit the share price. Conversely, big underwriters such as Morgan Stanley and others seemed to support the price once it hit the breakeven level.  Overall, Facebook’s inability to make a clean break to a significantly higher upside surprised some market pros. Shares traded below $40 in the final hour.  Some 82 million shares changed hands in the first 30 seconds and volume passed 100 million after four minutes.

“The opening was marred by a lengthy delay that had traders dumbfounded as to how one of the largest IPOs in history could have been mishandled. Traders apparently had trouble changing or canceling orders ahead of the offering, according to the Wall Street Journal.  Nasdaq officials told members it was “investigating an issue in delivering trade execution messages,” the Journal reported.  As for Facebook, the price eventually moved above $40 though it had been expected to head much higher before the trading day ended.

“Zynga, a fellow social networking side which focuses on games that appear on the Facebook site, saw its stock plunge more than 12 percent, triggering circuit breakers that halted trading.  LinkedIn, a networking site for professionals, also fell sharply. Chinese social networking site Renren got pounded as well.

One financial guru noted, Facebook has “a very big opportunity set ahead of them because their monetization, the amount that they actually earn per user, is actually quite low. There’s only upside to what they’ve been able to generate so far.”

CNBC noted that “trading was supposed to begin at 11 am on the Nasdaq, the platform that hosts many of the country’s top tech companies.  However, technical problems delayed the opening, causing murmurs on Twitter and around trading floors.”

Facebook began as a database of women students at Harvard University.  The site soon went viral and Zuckerberg and his partners opened it up for the use of the general public.  Initial users enjoyed the site’s discriminating feature:  “friending” and “unfriending”people.  When its popularity began to increase, Facebook fell into disfavor with its original base, who claimed that it wasn’t fun anymore.  They didn’t defriend Facebook, but they were disappointed.

So if Facebook is popular and useful, even if companies consider it a distraction for their employees (although the upside is that any company can, and usually does, have a FB site), then why are investors shy about putting their money into the stock?  Facebook has plenty of advertisers.  Zuckerberg is a billionaire.

Well, the problem is, Zuckerberg is a billionaire who made his billions without having to put much effort into it. Facebook users do the rest.  He’s had some hiccups, like the incredibly unpopular Timeline.  But otherwise, people love Facebook.

Investors are probably wary because Zuckerberg, in his iconic hoodie, pedals himself as one of the 99 percent, rather than the one percent he really is.  He earned his billions; he took my mother’s advice and invented something useful, if rather unsavory in its inchoate stage when he was still at Harvard.

They wonder what’s in it for them if he’s offering the service free to its users.  There, Zuckerberg is smart.  He follows the old-fashioned model of television in the Fifties and Sixties. The television broadcast was free; networks charged advertisers to sell their wares.  It must still work or Zuckerberg wouldn’t be a billionaire.

He’s vowed not to soak his customers, the users of Facebook.  ‘We created Facebook for you, not to make billions,’ Zuckerberg noted.  An age-old, disingenuous remark, but one that used to be accepted in Successful America.  Patronize the advertisers; buy their products, and they’ll pay Facebook more money to advertise their wares, and you get free access to Facebook.  We used to get free access to television, until Al Gore decided Evil Capitalism was at work, and pulled the plug on over-the-air broadcasts.  Now, everyone has to pay for the service, and in addition, pay for everyone who can’t afford the service but wants it.

One other thing may be worrying investors and that’s the potential threat of Big Government to regulate the Internet.  So far, their efforts have been thwarted, but Big Government is a tenacious, alpha dog that doesn’t give up easily.

Still, good luck to Zuckerberg and congratulations to him for adhering to the old adage:  Give the customer what they want.

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Published in: on May 19, 2012 at 9:38 am  Leave a Comment