Facebook's IPO in Painful Perspective

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

Shares in the social-media giant Facebook (NAS: FB) have been public for more than two weeks now.

The bad news is that they're down more than 35% since opening at $42 on May 18. The good news is that things could have been a lot worse.

The underwhelming Internet IPO
Big-name Internet IPOs have performed abominably of late, recording an average after-market return of negative-28%, almost the precise return of Yelp (NYS: YELP) , the online urban city guide.


The worst performer of the lot is Groupon (NAS: GRPN) , which is down 62% since going public last November. To provide some context, over the past few months, the daily deals site has had to restate earnings twice, is under investigation by the SEC, and recently replaced two-thirds of its audit committee.

Not far behind are game-maker Zynga (NAS: ZNGA) and Internet radio company Pandora Media (NYS: P) , both of which are down nearly 50% after initially launching above their IPO prices.

Indeed, the only two high-profile Internet IPOs of the past few years to perform admirably are personal finance website Bankrate and Facebook's counterpart for professionals, LinkedIn. The former is up 28%, and the latter is up 11% from its IPO opening trades. If you were a LinkedIn investor who received an initial allocation from the IPO, you would have doubled your money by now.

Facebook is consequently just one among many disappointing Internet IPOs -- neither the best, nor the worst:

Company

First Day Return

Two-Week Return

Total Aftermarket Return*

Total IPO Return**

Bankrate10%18%28%(7%)
LinkedIn14%(5%)11%84%
Yelp12%(1%)(28%)47%
Average(6%)(14%)(28%)49%
Facebook(9%)(34%)(36%)11%
Zillow(37%)(52%)(43%)185%
Zynga(14%)(14%)(44%)10%
Pandora(13%)(13%)(47%)25%
Groupon(7%)(12%)(62%)40%

Sources: Yahoo! Finance and Renaissance Capital.
*The total after-market return is calculated using the opening price per share on the first day of trading.
**The total IPO return represents the difference between the IPO price per share and the opening share price on the first day of trading.

Learning our IPO lesson
If there's one lesson we can take away from Facebook's IPO debacle, it's this: As a general rule, most, if not all, value is extracted before any shares ever trade on an exchange.

In every instance but one, the opening price exceeded the IPO price by an average of 49%. And in every instance but two, the subsequent return to retail investors has been negative, down an average of 28%. The spread between returns is a jaw-dropping 77%.

Thus, do yourself a favor and think about this the next time you're tempted to buy into the next big IPO.

Foolish bottom line
If you bought into the Facebook IPO and are looking for a better Internet name to buy, check out our latest free report, titled "Forget Facebook -- Here's the Tech IPO You Should Be Buying." Inside you'll learn about a company on the list above pursuing revenue growth through multiple channels. Claim a copy of this limited-time special free report today.

At the time this article was published Fool contributor John Maxfield has no financial interest in any of the companies mentioned above. The Motley Fool owns shares of Facebook, Zillow, and LinkedIn.Motley Fool newsletter serviceshave recommended buying shares of LinkedIn and Zillow. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners