Facebook IPO disappoints, stock loses 10.5% in 2 days

Investors who bought stocks of popular social networking site Facebook at its offer price of $38 are now down 10.5% after just two days of trading.

Yesterday, March 21, Facebook stocks (NASDAQ: FB) fell below its initial offer price, closing at $34.03.

Buying support from Morgan Stanley

On its first trading day on Friday, May 18, the stock closed little changed at $38.23. It reached an intra-day high of $45 thanks to buying support from the underwriters led by Morgan Stanley but succumbed to selling pressure yesterday as investors dumped FB stocks due to concerns that it was priced too high.

Days before the actual IPO, the underwriters announced Facebook is expanding the offer size and pricing the stock at the higher end of the announced price range, supposedly to meet popular demand but, more importantly, to raise more funds for the company.

FB’s market capitalization bigger than HP and Dell combined

The IPO gave Facebook $16 billion in fresh capital, as it issued 421.2 million shares priced at $38 each. This translates to at least $100 billion market capitalization, an amount even bigger than the combined market capitalization of Dell (market cap: $26 billion) and HP (market cap: $43 billion).

But yesterday’s drop in price wiped out more than $10 billion of Facebook’s value in just one day.

The stock was one of the most actively traded stocks on the NASDAQ in the last two trading days, with more than 581 million shares trading hands on Friday and around 168 million shares traded yesterday.

NASDAQ glitch, profit concerns

Traders and brokers partly blamed the drop in price to the “glitch” in the NASDAQ system on Friday that prevented investors from knowing for hours if their trades were executed.

Still the bigger issue is Facebook’s business model and how it can remain profitable. The company recorded $3.7 billion revenues and $1 billion net income in 2011 but investors are concerned because Facebook’s current Price-to-Earnings (P/E) ratio is 78.59 while its Earning per Share (EPS) is only $0.43.

See related stories:

• Salary & Compensation of Mark Zuckerberg, Facebook executives
• Facebook IPO: A look at FB’s Financial Statements