Not top of the pops
Investors have gotten used to a swift run-up, or “pop”, in the share price of tech firms that stage an initial public offering (IPO). But doubts swirling around Facebook’s business model meant that the giant social network’s stock failed to take off as some had expected on its first day as a public company on May 18th. Instead the IPO’s underwriters were forced to step in to prevent the shares slipping below their offer price of $38 as trading progressed on America’s NASDAQ stockmarket. At the market’s close they were swapping hands at $38.23, giving the company a market capitalisation of $105 billion.
That is still an absolutely breathing valuation, propelling Facebook ahead of the likes of Amazon and other high-tech behemoths such as Dell and Hewlett-Packard (which is rumoured to be about to lay off some 30,000 staff). Facebulls argued that the closing price was proof that Facebook and its advisers had pitched the offering perfectly. They also pointed out that early trading in the stock, whose price initially soared, was disrupted by unfortunate glitches in NASDAQ’s system, which temporarily caused confusion amongst investors who were not clear if their orders had been processed.
True, but the firm’s share price would almost certainly have dipped anyway without support from Facebook’s investment-banking friends. Some analysts reckon it will nowfall to around $30 as the euphoria surrounding the world’s largest internet IPO fades. (The Economist argued before the flotation that a valuation towards the lower end of the $28-35 price range that Facebook initially set for its shares was reasonable for a company whose long-term money-making prospects are still so uncertain.)
Facebook’s IPO has already caused some investors to reassess their holdings in other publicly listed internet firms. On the same day that the social network staged its flotation, Zynga, a social-gaming company that relies heavily on Facebook to generate customers for its games, and Groupon, which touts online coupons, were among several internet firms who saw their share prices plummet. Trading in Zynga’s stock on the NASDAQ was briefly halted on a couple of occasions because the price of its shares had fallen so sharply. By the time the market closed, the company’s stock price had dropped around 13%, to $7.16.
There are a number of theories as to why these firms’ shares tumbled. One is that when Facebook’s share price fizzled instead of popped on its debut, investors began to reappraise the prospect of other high-profile web outfits. Another, more plausibly explanation is that some investment firms dumped other holdings in web companies in order to switch the cash into the shares of the social-networking world’s 800-pound gorilla. This would explain the especially steep fall in the share price of Zynga, whose stock had been seen as a proxy for Facebook’s because of the firm’s close ties to the social network. (Zynga accounts for some 15% of Facebook’s total revenues.)
The heads of these firms will have to deal with this new headache. Facebooks’ hoodie-toting boss, Mark Zuckerberg, whose stake in the company is now worth $19 billion, also has some challenges to deal with. For one thing, he and his team need to show they can increase revenues fast enough to justify a stockmarket valuation that is more than 100 times Facebook’s 2011 profit. For another, they will have to deal with ongoing concerns about the network’s approach to data privacy, including a recently revised legal challenge brought by some aggrieved Facebook users.
A further challenge will be to hang on to Facebook’s brightest computer engineers once the lock-up period on their shares expires. On the eve of its IPO, the firm staged an all-night “hackathon”, in which programmers coded into the wee hours, as a signal that it intends to stay true to its start-up roots. But that may not be enough to motivate newly minted gazillionaries to stick around. And the lofty valuation applied to Facebook’s shares in the IPO could limit any upside in their price, making it harder for the firm to use stock options to lure bright engineers to it. In Silicon Valley hoodies and hackathons may be cool, but the prospect of Croesus-like riches is ever cooler. — economist.com
