Facebook IPO: Top 5 Reason For Smaller-Than-Expected First-Day Pop

By Sangeeta Mukherjee | May 19, 2012 08:36 AM EDT

Previous image Enlarge Close Next image

Share This Story

After creating a host of buzz and hype, the Facebook IPO fell flat on its opening day Friday. The share that was expected to flood the Wall Street witnessed a mere $0.23 jump in price. And the situation could become worse for the social media king and could go below the offering price if JP Morgan and Morgan Stanley didn't buy when the FB stock hit the offering price.

Why the historic public offering of the social media giant did not go as planned on Friday? While experts from various websites analyzed the reasons for smaller-than-expected first-day pop that include the Facebook Inc's exorbitant valuation and trading glitches, we have tried to compile the most important five reason which might have gone against the company's plan.

1. Over Hype

Matt McCormick, who helps oversee $6.2 billion at Bahl & Gaynor Inc. in Cincinnati, told Bloomberg that "[I]t's tough to live up to the hype." He further added that "[T]here's been a tremendous amount of hype with Facebook. People were expecting a bigger pop in the stock. After they didn't get it or they didn't get it to the extent that they wanted, they started to focus on the rest. There's concern about Europe and many people don't want to be long over the weekend."

2. $104 Billion Valuation

The company's valuation of $104 billion, which is based on expectations of future performance, was puffed up, according to almost 79% of investors who expressed their opinions in a recent Bloomberg poll. The valuation makes this young company bigger than McDonald's, Amazon, Hewlett-Packard and Cisco.

Although some experts found the Facebook valuation was reasonable, Global Equities analyst Trip Chowdhry believes its stock debut was "lackluster" as the company's growth prospects do not match with a high stock valuation. "They have serious technology and business model problems. Facebook is overhyped and drinking its own Kool-Aid," he said. "They are only getting $4.39 per user per year. Google gets almost $30 per user."

3. Aggressive Pricing

According to Alexei Oreskovic of Reuters, "Facebook has priced its IPO was equivalent to more than 100 times historical earnings, compared with Apple Inc's 14 times and Google Inc's 19 times." And, that went against the company Friday.

4. NASDAQ Mistake

NASDAQ delayed Facebook IPO for 30 minutes. Facebook was scheduled to go public at 11:00 a.m. ET on Friday, but it was almost thirty minutes late. Moreover, the stock exchange delayed filling orders for the FB stock for about two-and-a-half hours.

5. GM moved out of FB

General Motors (GM), one of Facebook's major advertisers, decided to pull off advertising as it wasn't effective for the motor company. Although no other advertiser made the same decision of moving out of FB, GM's this decision has certainly made negative impact on the investors who anticipate that the company's first-quarter revenue might decline with the loss of GM advertisement.