After Its Busted IPO, Is Facebook Doomed?

Before you go, we thought you'd like these...
Before you go close icon

Shares of Facebook (NAS: FB) were always destined for notoriety. But few investors expected the particular notoriety it now has.

Yesterday, Facebook joined the growing group of recent stocks that now trade below their initial public offering price. In the aftermath of a long-anticipated first day of trading that included only a modest pop at the open that quickly eroded to almost no gain at all, the social media star's team of underwriters chose not to defend its stock today from falling below its $38 per-share offering price.

Many analysts seem to think that yesterday's price drop is a death sentence for Facebook as a successful investment. Yet even amid the wreckage of a number of similar busted IPOs, Facebook should look instead to those examples of companies that overcame adversity to reach eventual success.

Why the doom and gloom?
Long-term investors may wonder why everyone's so convinced of Facebook's demise after just two days of trading. After all, the stock has traded for years on private exchanges, and the price action there has been quite impressive, with investors lined up to grab shares at ever-rising prices.

But now that Facebook has gone public, it brings up a whole new set of criteria to judge it by. And unfortunately, recent experience with stocks that fall below their IPO offering price has been almost entirely negative:

  • Zynga (NAS: ZNGA) came public at $10 and traded as high as $11.50 before falling to close its first day at $9.50. Despite a short-lived rebound that took the shares to nearly $16 briefly after Facebook filed its IPO paperwork, the shares are now back in the single digits and riding Facebook's coattails downward.
  • Past social media offerings have seen similar fates. Renren (NYS: RENN) got lots of hype as the Facebook of China and got a nice first-day pop, with shares offered at $14 and opening at $19.50 to trade as high as $24. But it didn't take long for the stock to drop precipitously, and you can now buy shares of the company for less than $5.
  • Even old, low-tech companies can be victims of busted IPOs. One example is General Motors, which emerged from bankruptcy with an improved balance sheet and went public in Nov. 2010 with a $34 offering price. Yet after a brief rise into early 2011, the stock finally gave ground and is now struggling to avoid falling to its recent lows around $20.

Clearly, busted IPOs have greater meaning to investors than just a lapse in company fundamentals. Failing to sustain a company's IPO price carries huge psychological weight that can create a self-fulfilling prophecy if the company's fundamentals can't overcome negative sentiment.

Waiting for wins
But just because a stock trades below its IPO price for a little while doesn't doom it entirely. Two years ago, Jinko Solar (NYS: JKS) fell right out of the gate from its offering price of $11, convincing many that the solar fad had come to an end. But by summer, the market had recovered, and Jinko shares had more than doubled as it turned out that the solar industry had another year or so before a sectorwide plunge brought Jinko and all of its peers down sharply.

Even more lasting was the experience of (NAS: PCLN) . After going public at $16 per share in early 1999, the stock opened at about $75 and soared to $165 within the next month. Yet from there, prices started to fall, and by late 2000, the stock traded as a busted IPO and would eventually fall as low as $1. Yet now, even adjusted for a 1-for-6 reverse split, Priceline shares are well above not just the IPO offering price but the first-day opening price as well.

Don't give up
From here on out, Facebook's value has nothing to do with the price at which it offered shares on May 18, 2012. If the fundamentals of the company bear out its potential, then its stock will rise. Otherwise, it will fall. Over the long run, the fate of Facebook and its investors is really as simple as that.

With Facebook's IPO over, it's time to look forward to the next big offering. There's another social media company that recently had its own IPO and looks even more promising. Read about it in our special report, "Forget Facebook -- Here's the Tech IPO You Should Be Buying," and learn about a company with less reliance on ads and more obvious potential for profit. Do yourself a favor and grab a free copy of this report to find out more.

At the time this article was published Fool contributor Dan Caplinger knows you at least have to give a stock a 10-count before you call the fight. You can follow him on Twitter @DanCaplinger. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Motley Fool newsletter services have recommended buying shares of and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy will never bust you.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

People are Reading