After months of hoopla, Facebook finally went public on Friday at an IPO price of $38 per share, with expectations that the number could rise by as much as 50% before the market closed. Unfortunately, things didn’t quite pan out that way and, after peaking at just above $42, it settled down at $38.23, a mere gain of under 1%. Even this morning, shares took a more than 12% plunge down to $33. Despite it being all anyone’s talked about prior to, there clearly were red flags that prevented investors from putting their full faith in the company. Zuck may have just gotten married, but the honeymoon’s already over.
1. The stock was fairly priced. At $38 per share, most analysts agreed that it was an accurate price that reflected the true value of the company. Thus, as it stands, until Facebook does something to better itself, expect the share price to linger in the $38 range or slightly below.
2. The market was flooded with over 500 million shares. This one is simple Econ 101. If there is a shortage of shares and everyone is fighting to get them, then the price will shoot up. But, if there are enough to go around, most people will get them at a decent price, without artificially increasing its value.
3. Facebook is struggling to find other sources of revenue. As it stands the social network is only making money from users who click on ads at their computers. However, all you mobile users know that there aren’t any ads when you log into Facebook from your iPhones or iPads or Droids. No ads = no money, and that’s not a good look, especially when people are shifting from computers to mobile devices faster and faster every day. In the near future, Facebook will have to adapt in order to make money from mobile ads.
4. Zuckerberg lost one of his biggest clients just before Facebook went public, further increasing investor skepticism of its profitability. When GM backed out, they said they wouldn’t be advertising through Facebook any more because they were getting better results elsewhere – i.e. Google – and focus more on its Brand Pages. When they left, they took their $10 million ad budget with them.
5. Despite being constantly compared to Google during its flashy IPO days, Facebook is quite different. The social network is a much more mature company now than Google was when it went public. At the time, the search engine was full of potential, looking to capitalize on its new model of targeting ads, as well as on the brink of venturing off into other lucrative prospects. However at this stage of the game, Facebook has already arguable realized most of its potential, and is having a hard time continuing the rapid pace of innovation that it showed when it was on the come up.