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Facebook: One Year on the Open Market

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zuckerbergThere has never been a company quite like Facebook. With over 1.1 billion active users every month, it’s the second most visited site on the Internet and has revenue figures of over $5 billion. Facebook spearheaded the social media phenomenon, condemning competitors like MySpace (once the most visited site on the Internet), Friendster and hi5 to obscurity. And yet, the Wall Street Journal described Facebook’s initial public offering in May 2012 as a “fiasco”. How could a company as powerful and dominant as Facebook stumble so badly? Here’s a look at Facebook’s one year on the open market.

The Most Controversial IPO in History?

In February 2012, Facebook filed the paperwork for an initial public offering valued at $5 billion, one of the biggest such offerings in technology history, and the biggest IPO in the Internet era. At $38 a share, the company’s stock was valued at $104 million, the biggest valuation in history for a newly public company and outstripping McDonald’s, Citigroup and Amazon. The $16 billion raised by the initial public offering is the third largest in American history, behind only General Motors and Visa.

But a combination of problems – orders prevented from being processed due to technical glitches (in 30 seconds, 82 million orders were placed), and the revelation that some of Facebook’s chief underwriters (Goldman Sachs, Morgan Stanley and JPMorgan) cut their earnings forecasts for Facebook in the middle of the company’s IPO roadshow – led to the company’s stock losing over a quarter of its starting value within a few weeks.

Only a few investors knew of the underwriters cutting their estimates (perhaps at Facebook’s prompting, for fears the preliminary forecasts may have been too aggressive), putting those investors at an unfair disadvantage against those who knew. The information was selectively disseminated to preferred investors. When news of the suspected over-valuation and the leaking of such material information started to trickle through, confidence in Facebook’s stock started to slide. By August 2012, Facebook had lost $50 billion in value.

The Maturing of Facebook

All that was a year ago. Now, after the dust has settled, where does Facebook stand in the open market? Despite the IPO being an “unmitigated disaster”, according to a Chicago securities attorney, Facebook’s enduring popularity and deep entrenchment in the myriad online worlds has led to the company’s profitability. Majority analysts consider Facebook stock a “buy”. Monthly shares cost an average of $32, with highs of $37.

The Mobile Miracle

A senior equity analyst at S&P Capital IQ said that Facebook’s targeting of the mobile computing market may have saved it from a greater freefall. Given the popularity of smartphones and tablet devices, the move to integrate Facebook with the next wave of computing may have reassured investors that, despite the botched IPO, Facebook’s staying power remained untouched.

The Toronto Star puts it more clearly: Facebook focusing on the mobile market doubled its lowest shares. A year after the disastrous initial public offering, Facebook’s stock has stabilized, and investor confidence has largely returned since the shock of the over-valuation and overpricing wore off.

The End of the Honeymoon

But the scars are still there. Even in 2013, Facebook’s shares have never reached their first-day close of $38.23. On the one-year anniversary of the IPO, the shares came to rest at $26.25. Analysts worry that even with billions under its belt, Facebook’s revenue is not growing the way it used to, and despite the success in integrating with the mobile world, Facebook’s own venture, Facebook Home, received a mixed reception on debut. The enthusiasm that greeted Facebook before its IPO is long gone.

The Wild Wild Web

One year on the open market, Facebook is still going strong. Reports of its demise may be premature, but for those who remember the dotcom boom of 2000s, the wildly optimistic estimates and the overcompensatory damage control of the Facebook IPO serve as a reminder that even with Mark Zuckerberg’s dominance and the ridiculous sums of money thrown at his dorm room creation, the World Wide Web can still be a very wild place.

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About Drew Hendricks