Who's to blame for Facebook's stock debacle?
Facebook stock has been sliding nonstop since Friday, when, to much fanfare, it debuted on the Nasdaq at $38 a share and sold a hefty $16 billion worth of stock. The share price hovered around $38 on Friday, but closed at just over $31 on Tuesday, an 18 percent plunge. With 900 million users, Facebook is the biggest social network in the world, and many had expected the stock to pop as soon as the shares hit the market. So what went wrong? Here, five possible culprits for Facebook's abysmal performance:
1. Morgan Stanley
The investment bank was in charge of Facebook's IPO, and it's being criticized for pricing the company at a stratospheric $38 a share — which valued the company north of $100 billion. The bank made "decisions with little input from other underwriters," who were less bullish about the offering price of $38, says The New York Times. Furthermore, Morgan Stanley distributed larger-than-expected allotments of shares to institutional investors, which "spooked" them into thinking demand was low, says The Wall Street Journal. In short, too many shares at too high a price led to a wave of selling.
Like Morgan Stanley, Nasdaq expected to be wreathed with glory on Facebook's debut. But the IPO was marred by glitches that delayed the initial offering, stalled trading orders, and scared off investors who were left in the dark.
The social network gave investors plenty to worry about in the weeks running up to the IPO. Auto giant General Motors pulled its Facebook advertising over complaints that the ads didn't boost sales, sparking concerns that Facebook's revenue model was flawed. In addition, analysts said Facebook was behind the curve in adapting to smartphones, which are expected to be the primary platform for social media in the future.
4. Profit-hungry insiders
Now that Facebook's stock is plummeting, it's clear that CEO Mark Zuckerberg and other "insiders — the company's founders, employees, and venture-capitalist backers — had bagged most, if not all, of the company's value for themselves," says John Cassidy at The New Yorker. These stakeholders milked the IPO for all it was worth, encouraging ordinary investors to buy in at inflated prices. That could set a harmful precedent for future IPOs. If "virtually all of the rewards are reserved for insiders, ordinary investors will refuse to play the game."
The Facebook IPO represented "pretty much everything that is wrong with the stock market today," says Mark Gongloff at The Huffington Post. "Media and analyst cheerleading? Check. The destructive influence of high-speed trading? Check. A system built for insiders to profit while retail investors pick up scraps? Duh." The whole charade will "likely further cement Main Street's hatred and distrust of Wall Street."