The bloom has quite fallen off the Facebook rose: On Tuesday, its third day of trading, the social media giant’s stock fell more than 18% from its initial share price of $38, closing at $31 and indicating that investors are quite quickly realizing that the company’s initial valuation may be “out of whack.”
To add to the controversy about Facebook’s debut as a publicly trading company, regulators from the US Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) said they may open a probe of Morgan Stanley as to whether an analyst shared negative information about Facebook with some institutional investors prior to the initial public offering last Friday, May 18. Morgan Stanley was the lead underwriter for Facebook’s IPO; Bloomberg says the analyst reportedly “lowered a Facebook revenue forecast after the social-networking company said growth in mobile products could hurt its business.”
Morgan Stanley says that it was indeed “in compliance with all applicable regulations,” according to the BBC.
Further clouding Facebook’s IPO is a potential class-action suit filed against the Nasdaq stock exchange by Maryland resident Philip Goldberg, claiming that investors lost money due to technical problems which delayed Facebook’s market debut by a half hour. This acknowledged “glitch” meant that orders to buy or sell shares were disrupted.
So are the bankers to blame for Facebook’s sputtering start?
CNET’s Roger Musil argues that Facebook has no one to blame but itself:
…the underwriters cut their estimates because a Facebook executive instructed them to. A source tells Henry Blodget at Business Insider that the estimate reduction was then “verbally conveyed to institutional investors…but not to smaller investors.”
As Blodget points out, this “selective disclosure” posed a significant disadvantage to small investors who bought the stock with faith in the information the company the company was legally required to publicly disclose. Blodget — a former equity research analyst — also suggests that such secrecy may violate securities laws.
Also on CNET, Roger Cheng points out another Achilles heel for Facebook, its business model:
Facebook hasn’t quite figured out its business model and how to fully take advantage of the large audience it has captured. More worrisome to investors is Facebook CEO Mark Zuckerberg’s insistence that profits take a back seat to the user experience, an admirable goal for consumers, but a scary prospect for shareholders.
What’s becoming more and more clear is that Facebook does not yet seem to know how to capitalize on its approximately one billion users, a problematic state of affairs for its investors — though not necessarily for all those users, happily using Facebook’s site and, as happily, doing so without clicking on a single sponsored story.
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