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Facebook’s IPO gets few ‘likes’

As the drama surrounding the Facebook initial public offering (IPO) continues, questions are being raised about the future of the company and the implications of the disappointing public debut of the world’s largest social network.

In what was the biggest tech IPO in Silicon Valley history, Facebook went public on 18 May with founder and CEO " rel=tag>Mark Zuckerberg symbolically ringing the Nasdaq bell from the company’s Menlo Park headquarters.

Facebook shares were initially priced at the top of the range at $38 dollars, reportedly in order to capitalise on high demand. The number of shares due to be sold were also increased by 25% shortly before the listing. Analysts noted the final share price gave the company an overall valuation of over $100 billion – widely considered to be severely inflated, given Facebook’s financials and business model.

While shares were initially expected to “pop” on the first day of trade by as much as 50% (in line with the trend of other tech IPOs such as and Zynga), Facebook stock has instead only been decreasing in value, currently sitting at just above $31.

The finger-pointing began immediately as it became clear the social network’s IPO was not living up to the hype. Two completely separate issues have emerged – the first is Nasdaq’s fumbling of the first day of trade and resultant problems, and the second is the questions surrounding the way Facebook and its underwriters handled sensitive financial information prior to the listing.

On the Monday following the listing, Nasdaq admitted to a technical glitch that had held up sales and led to mass confusion among early investors. According to reports, the process Nasdaq ordinarily uses to match orders to buy shares, with orders to sell, fell into an unexpected loop. While Nasdaq switched to another system, some orders weren’t processed while others were filed at a lower price much later in the day.

The impact of the Nasdaq blunder had a ripple effect throughout the following week, with brokerage firms reporting they were still in the dark as to whether their orders had gone through. Those who suffered losses due to the “technical error” are also waiting to hear if Nasdaq will offer compensation.


Nasdaq aside, in the week following the listing, six law firms filed class action suits against Facebook for supposedly misleading investors regarding its future earnings. US congress is also said to be launching a regulatory investigation.

Among the claims against the social network is the submission that Facebook’s IPO registration statement was “materially false and misleading”. A key point of contention is a supposedly significant drop in Facebook’s revenues due to users shifting to mobile.

Just three days after the IPO, it emerged that a chief underwriter of the listing, Morgan Stanley, had cut its earnings forecast for Facebook prior to the Nasdaq debut – selectively telling a handful of investors of its reviewed forecast.

Later it also emerged that three other major underwriters (Goldman Sachs, JP Morgan and Bank of America) had similarly reduced their earnings forecasts for Facebook – all to similar levels – shortly ahead of the IPO.

Facebook released a statement on Wednesday 23 May saying the class action suit is “without merit” and Morgan Stanley says it followed “the same procedures for the Facebook offering that it follows for all IPOs”.


While questions continue to swirl, a number of critics have now turned to Facebook’s business model to determine the true price of its stock and to find answers for its underwhelming performance.

Some critics have gone to the extreme – going so far as to predict that Facebook will “go bust” and take the ad-based Web with it. This, they say, is due to the company’s fl awed business model, and the fact that it does not have a set strategy to grow its revenues.

Just before Facebook’s IPO, news broke of General Motors’ plans to pull all of its advertising from the platform due to a lack of effectiveness. While the $10 million in advertising that Facebook will lose from GM is unlikely to dent the company’s bottom line, analysts say what is more significant is what the news says about the overall effectiveness of Facebook Ads. While mobile has been constantly spoken of as a potential stumbling block for the social network, it may be Facebook’s advertising model as a whole that needs attention.

While Facebook does not publish its average click through rate (CTR), independent analysis by Wordstream of more than 11 000 Facebook campaigns showed the social network has a CTR of about 0.051%. According to the statistics, this is almost 10 times lower than that of Google’s display ad network, which has a rating of 0.4%. The report notes that depending on targeting options, Google’s CTR can be up to 36 times higher.

The same report quotes Zuckerberg from his letter to shareholders for the company’s official S1 filing: “Facebook was not originally created to be a company. It was built to accomplish a social mission – to make the world more open and connected. Simply put: we don’t build services to make money; we make money to build better services.”


Forrester analyst Nate Elliot noted Facebook’s valuation was based on its strong history of innovation. “As good as Facebook has been at evolving to serve consumers, that’s how bad it’s been at serving marketers,” says Elliot.

According to Elliot, Facebook has lurched from one advertising model to the next over the past five years. “One global consumer goods company told us recently that Facebook was getting worse, rather than better, at helping marketers succeed. And companies in industries from consumer electronics to financial services tell us they’re no longer sure Facebook is the best place to dedicate their social marketing budget – a shocking fact given the site’s dominance among users,” says Elliot.

Elliot adds marketers shouldn’t count on things improving anytime soon. “We wish we could predict this IPO would serve as a new beginning for Facebook’s marketing offering, and that a new focus on becoming a grown-up business would inspire the company to put even half the energy into serving advertisers that it does into serving users.

“But we doubt Zuckerberg’s going to wake up any day soon having acquired a taste for advertising, or even a proper understanding of it. And so every day more smart marketers are going to wake up and look for other places to dedicate their social resources.”


Local analyst and MD of , , says overall the media coverage of the Facebook IPO is “a classic example of the micro-thinking American analysts exhibit when they look at share performance, market share, and the like”.

“Instead of looking at the overall trend, they merely focus on a snapshot and treat the snapshot as the whole story,” says Goldstuck.

“The truth is Facebook should never have listed at $38. That was sheer greed at work, premised on the fact that there was massive appetite for the share when the original suggestion of coming on at around $28 was suddenly upped to around $34. A graph of the growth of Wall Street greed leading up to the listing would be a far better indicator of what went wrong than a graph of the share price performance.”

Goldstuck says when the IPO went live, sponsors had to support it with massive buying whenever it neared the $38 floor. “That made it inevitable the share would dip substantially below $38 on the Monday following the listing.”

According to Goldstuck, while the stock has currently dropped to $31, he believes $28 would still be the more realistic pricing (since that was the level it was positioned at during the run-up to the listing).

“This all suggests that Facebook as a company has not flopped, but rather that Wall Street stuffed up yet again,” asserts Goldstuck.

“The fact remains that Facebook’s market cap is now around $85 million to $90 billion, which most non-believers still believe is an absurd valuation for a company built on turning its users into a commodity. The losers are the people who bought on the day of the listing, but if they didn’t understand that they were in fact gambling, I’ve got a great bridge from London to sell them.”


Goldstuck says speculation that Facebook as a company is on course to go bust is unfounded: “Linking a comedy of listing errors to the likelihood of Facebook collapsing may work for news headlines, but flies in the face of logic. The company has raised the $10 billion it wanted from the listing, and is not going to disappear very fast.”

According to Goldstuck, any negative implications from the Facebook listing are not for the future of social media companies, but rather for the way listings of red-hot tech stocks are handled.

In terms of Facebook’s business model, Goldstuck says the network has only just begun to explore advertising models.

“It is generating serious revenue, and will probably find ways to boost that revenue substantially in the coming years. Of course, Zuckerberg’s ego could always act as a brake on the company’s progress, but chances are that he also wants to see the business boom,” says Goldstuck.

“Facebook will soon have a billion registered customers. That is the number that will matter, rather than a share price that is subject to the whims of an emotional and often short-sighted market.”