As Mark Zuckerberg marries long-time girlfriend Priscilla Chan on the wake of Facebook's historic IPO, all the hype surrounding Facebook’s IPO somewhat ended in a deception. While many analysts had anticipated a surge of over 25%, Facebook stock closed at $38.23, for a gain of 0.61%, which is only 23 cents beyond its introductory course. Not quite a surge!
Yet within minutes of opened trading, Facebook shares soared by 12%, but all gains later vanished to return to its initial value. And the situation could have been worse if underwriters would not have stepped in and buy shares to keep the price from slipping below its IPO price. So why didn’t Facebook pop on its public debut?
The initial Facebook price ranged from $28 to $35. But given the enthusiasm generated by the IPO, and to meet a huge demand, the company not only added 50 million more shares but also priced the stock at about $34 and $38. This might have left no much margin to any potential increase. A chief investment officer at Palisade Capital Management quoted by Reuters said that the social network “squeezed the lemon dry” and did not leave room for a “better support of the shares in the aftermarket.”
It also appeared that the market was not that confident about the whole operation. Goldman Sachs, which also actively participated in Facebook’s development, ‘got rid’ of half of its 22% shares before even the trading went public. It was followed by Peter Thiel (another insider), who sold 50% of his shares instead of the 22% previously announced. Questions were raised on why were company insiders detaining longtime shares selling them just a day before they go public? It sent negative signs on the project’s dynamic and contributed in establishing a suspicious climate on the market debut.
Investors are concerned about Facebook's real capacity to generate profits in a sustainable way. The company earned $3.7 billion in sales in 2011 (10 times less than Google) and made no secret that it was struggling to cope with the gradual users’ (448 million already) migration to mobile devices that allow little or no advertisements. Especially, since it gets most of its revenues from advertising. In fact, Facebook's profits for the first quarter of 2012 fell to $205 million and revenue growth is expected to slow for a third year, whereas the marketing costs have doubled.
The concerns were compounded by General Motors' announcement the withdrawing its $10 million ad campaign from the social network, prompting a debate on the effectiveness of advertising on the site.
Facebook's business model leaves uncertainties about its future. It will probably have to diversify its sources of revenue without frustrating the users, who are there mainly to chat with friends and not looking for bargains. For its IPO, the company only managed to avoid embarrassment, thanks to the underwriters. However things could get complicated in the coming weeks if it were to face it all alone.