Facebook listing letdown ‘sign of investor caution’
FACEBOOK’S unimpressive stock market debut suggests investors are not ready to jump in and create another technology bubble despite big expectations for social media, analysts say.
It closed its first full week of trade with a loss of 16% from its offering price of $38, in a huge disappointment after a muchhyped initial public offering worth $16bn, the biggest for a technology company.
The stock failed to live up to the anticipation of some who thought investors would be stampeding to get a piece of the network, which has 900-million users.
“When you see Facebook share prices tank, it does get people back onto a more foundational basis, in terms of real revenues, real profits,” Nick Landell-mills of Indigo Equity Research says.
Mark Heesen, president of the National Venture Capital Association, says investors are being more cautious than during the hi-tech bubble of the late 1990s. “This is by no means the end of social media. It is going to continue to grow and expand,” he says.
During the tech bubble, though, “venture capitalists invested $150bn in two years. In the last two years we invested about $60bn. There is much, much less money in the system right now. That’s critically important.”
Gerard Hoberg, professor of finance at the University of Maryland, says he does not expect a new bubble given today’s market sentiment.
“I think it’s very healthy and I think people learned the lessons from the 1990s,” he says. “It’s preventing a bubble from forming.”
Facebook appeared to be the driving force in a surge into social media. But some of its social media brethren are also being watched cautiously. Zynga, the social gaming website which has strong ties with Facebook, has lost about 35%, and online deals company Groupon has slid about 40%. However, professional social network Linkedin has doubled in a year since its initial public offering (IPO).
Mr Heesen says the mixed reaction to these IPOS has taken some of the froth out of the market.
“If Facebook languishes, that does send a signal to others (technology companies) that maybe going public is not the best option — maybe getting acquired or trying to wait out this volatile period is better.” He says, “The whole social media arena is still ripe for investment,” but cautions that there will be “bumps along the road”.
Mr Landell-mills says even though investors appear unwilling to chase share prices, they will flock to a company that makes real profits, like Apple, which has risen 67% in the past year. “I’d never call Apple a bubble,” he says.
He says Facebook has a high valuation when measured by earnings, unlike companies such as Google.
“When Google went to its IPO there were some very clear data points which suggested it added value,” he says. “With Facebook, we don’t know.”
But Mr Hoberg says the market does not have the exuberance of the 1990s. “People are not going to let a frothy stock keep going, they’re pushing back.”
He says any new IPO will have to take into account the Facebook fiasco: “This reaction is so negative and the underwriters are getting so much bad press, they cannot afford to have that happen again, so they’re going to take steps to underprice the next one.” SAPA-AFP