Issue of the week: Why Facebook’s IPO fizzled

last updated 8 January 2015

There’s an old saying on Wall Street, said Gretchen Morgenson in The New York Times: “If you can get your hands on a hot new stock, you probably don’t want it.” Facebook’s dud of a market debut last week is a case in point. Despite being the most hyped initial public offering in a decade, shares fizzled, closing on opening day at $38.23 a share, up a mere 23 cents. And that was only after Wall Street underwriters like Morgan Stanley bought millions of shares to prop up the price and prevent further embarrassment. This week, the dud turned into a debacle. By close of market Wednesday, shares had dropped nearly 16 percent, to $32, wiping billions of dollars off the social network’s market value in a matter of days.

There’s plenty of blame to go around for this train wreck, said Mark Gongloff in HuffingtonPost.com. Facebook’s bankers, mistaking hype for huge demand, set the opening price too high and encouraged Facebook to offer too many shares. “Potentially far more insidious,” those same underwriters are now being investigated by regulators for allegedly telling only select clients that Facebook’s future-revenue estimates weren’t as rosy as hoped, while leaving other investors unaware of the bad news. And Nasdaq, the stock exchange that hosted the IPO, was plagued by technical failures, including delays and unconfirmed orders—more evidence of the “destructive influence of high-speed trading.” In the end, this IPO represented “pretty much everything that is wrong with the stock market today.”

Finger-pointing aside, Facebook’s flaws are much clearer now that the hype has died down, said Sam Gustin in Time.com. Investors are banking on the idea that the company can radically increase its advertising profits and thrive. But Facebook’s “revenue growth is actually decelerating.” General Motors, the country’s third biggest advertiser, just pulled its business, saying ads on the social network simply weren’t selling cars. And the future does not look bright, said Michael Wolff in TechnologyReview.com. Facebook’s success depends on the Internet becoming a more profitable advertising platform than traditional media is. Unfortunately, that’s turning out to be “one of the great business fallacies of our time,” and it will bedevil Facebook’s bottom line just as it has that of every other media company. “The crash will come. And Facebook—that putative transformer of worlds, which is, in reality, only an ad-driven site—will fall with everybody else.”