As Facebook fell, here’s who it squashed
Investors start with high hopes, end up disillusioned
NEW YORK — On the eve of Facebook’s highly touted initial public offering two weeks ago, Murli Gupta, a math professor at George Washington University, snared 50 shares of the social networker’s stock from E-Trade at the $38 offering price. He had visions of a 1990s-style first-day price pop. And wouldn’t rule out a spike to $60 a share.
“I got into this IPO to try to make money,” says Gupta, 65, admitting that the hype put him in a buying mood despite reservations about Facebook’s ability to make enough money via advertising to match the lofty expectations. “I was hoping it would climb up high like some of the other hot IPOs, like Red Hat (which nearly tripled on its first day in August 1999) or Google (which jumped 18% in 2004).”
But the trade didn’t pan out as planned. After a short-lived 18% surge, the stock closed up less than
1% on its first day and has stumbled since. As a result, Gupta and countless other retail investors — who were allotted an unprecedented 25% of Facebook IPO shares — again found themselves on the losing side of a Wall-Street-hyped investment gone bad.
In its first nine trading days, the stock has woefully underperformed, and its reputation has been tainted by controversy and dashed expectations. It closed Thursday up $1.41 at $29.60. That’s 22% below its offering price and 34% below its first-day peak of $45.
Facebook shares have been hurt by a first-day trading glitch, complaints of too many shares offered at too high a price, and lawsuits alleging that the Nasdaq Stock Market botched things and that deal underwriters failed to share lowered earnings forecasts with mom-andpop investors before the IPO.
The IPO’s black eye has translated into red ink and frustration for investors like Gupta, many of whom have already given up on the stock. Gupta, after hoping for a rebound that never materialized, sold his Facebook shares Thursday morning.
“The last straw? Another dollar down (in the morning), with no hope of a positive correction,” Gupta told USA TODAY seconds after he hit the sell button. His loss after dumping his 50 shares at $27.05: $547.50.
Early warning signs
Cracks in the Facebook story started to emerge in the days leading up to the first day of trading on Friday, May 18.
In a May 9 regulatory filing, Facebook warned that future revenue would be hurt by a dearth of advertising on handheld devices, which its users were increasingly using to access the site. A major advertiser also questioned the effectiveness of Facebook ads, undermining the thesis behind its main source of income: ad dollars.
The night before trading commenced, the company and underwriters said IPO shares would price at $38, the high point of an upwardly revised range. That price valued Facebook at nearly 100 times its estimated earnings, vs. a priceearnings ratio of less than 20 for Internet search engine leader Google. Facebook also increased the number of shares it was selling by 25%, in essence flooding the market with shares.
While lead underwriter Morgan Stanley has said it handled the IPO no differently than other initial public offerings and that it was in “compliance” with all regulations, the investment bank has yet to fully defuse the blame directed at it. (Facebook can’t comment publicly yet due to a 40-day quiet period imposed by regulators.)
The Facebook IPO, which is being reviewed by regulators, is another example of Wall Street dealmakers profiting at the expense of Main Street, says Gary Kaltbaum, president of Kaltbaum Capital Management. “Nobody gives a flying crap about whether (underwriters) worked within the rules,” he says. “What people care about is the ethics and lack of fiduciary responsibility when bringing public a company with a $104 billion market value that has less than $4 billion in revenue. What about giving a hoot about the investing public, instead of . . . trying to amass the highest price possible, leaving not one crumb left over for the investing public?”
Stacy Harris, 60, a newsletter editor in Nashville, is another investor who got her hands on Facebook shares at the offering price in search of riches but ended up with a small paper loss. Her experience left her “disappointed” in the IPO process. She got 500 shares at $38 from her broker at Smith Barney, Morgan Stanley’s retail arm.
She says she, too, wanted to “make a quick profit.” Her plan was to flip 400 shares on the first day of trading, which she did at a profit, despite not getting quick confirmation of the trades due to glitches. She held the other 100 shares for the long term. She made around $800 on the shares she sold, but is down $840 on the shares she kept.
Not quite the killing she envisioned, especially given that for once she got her hands on IPO shares before they started trading, just like the big investors do. “The upsetting part is, supposedly I had the edge,” says Harris.
While she doesn’t know enough to say where the “culpability lies,” she says there is plenty of blame to go around. She blames Morgan Stanley for being “dishonest” for allegedly only telling favored clients about its analysts’ decision to downgrade their Facebook forecasts. She blames Nasdaq for its systems failure. She also pointed the finger at Wall Street regulators. Says Harris: “I feel a little bit betrayed.”
Vikas Arora, 47, an investor from Chantilly, Va., who flipped 20 Facebook shares on day one of trading for a profit of $2 per share, has bought more and now holds 100 shares at an average price of about $31 a share. To protect himself, he is using an options strategy that lets him make money and offset losses when Facebook shares fall.
“I didn’t expect the stock to go down from $38 to $28 — it was a big surprise,” says Arora, who still worries about Facebook’s sky-high valuation and the possibility that the company will be unseated at some point by an unknown upstart. He says the lesson of Facebook’s meteoric rise and fall is: “Buyer beware. Do your homework.”
What’s Facebook worth?
Currently, Standard & Poor’s has a price target of $27 on Facebook, Needham’s 12-month target is $40 and Thomson Reuters says fair value is about $10.22.
Facebook, a long-term investment? No way, says Jon Weiner, a retired 56-year-old currency trader in Coral Gables, Fla. “I got in and out of the stock 20 times, and I earned about $1,100,” he says. “But I have no plans to get back in, as I prefer stocks that generate income. If I want current income, I am looking for companies with a history of growing cash flow, growing dividends, and Facebook doesn’t meet any of those yet.”
But Jay Hornback, 39, a sales manager in Dardenne Prairie, Mo., would still consider buying Facebook even though he’s thrilled a trade he put in to buy shares at $42 never got filled due to technical difficulties. “It’s on my stock watch list. It has long-term value.”
The Facebook fiasco shows that IPOs should be left to the pros, says Danielle Tierney, an analyst at Aite Group. “Retail investors have no place in IPOs,” she says. “IPOs are risky investments. You don’t have a trading history or a history of quarterly conference calls or brokerage ratings. Management has not been under scrutiny. It’s not like investing in Coca-Cola.”
Mark Nicolussi, 44, an engineer from Erie, Pa., who lost money on the Martha Stewart IPO years ago, agrees: “There is no rule written anywhere that IPOs always go up.”