Don't Believe The Hype

Facebook, the social networking site that raised $16 billion in an initial public offering, fell below its $38 offer price in its second trading day.

The shares dropped 11 percent to $34.03 at the close in New York. The stock rose less than a percent to $38.23 at the close of its first day of trading on May 18.

Facebook, with more than 900 million users, is trying to attract more marketers to boost sales as competition increases. The company, the biggest provider of online display ads in the U.S., is set to lose the top spot to Google next year, according to EMarketer Inc. The offering valued Facebook at 107 times trailing 12-month earnings, more than every S&P 500 member except Amazon.com Inc. and  Equity Trade Today’s slump reinforces concern that the IPO was priced too high.

“Investors are clearly recognizing the risks embedded in the stock,” said Brian Weiser, an analyst at Pivotal Research Group LLC, who has a sell rating on the stock and doesn’t own it. “It’s just been priced for perfection at the IPO price, and that’s clearly unrealistic.”

Morgan Stanley, the bank that handled the IPO, stepped in to prop up the stock to keep shares from dipping below the offer price on May 18, said people with knowledge of the matter, who asked not to be identified because the purchases were private.

Shareholders ‘Want Out’

“It looks like they’re through spending their own money to support the price,” Francis, president of researcher IPOdesktop.com in Marina del Rey, California, said in an interview today. “Shareholders are lined up at the gate --they want out.”

The IPO also suffered from trading glitches on its first day. Nasdaq Chief Executive Officer Robert said a “poor design” in software driving auctions for IPOs caused issues with Facebook’s first trading day.

Morgan Stanley completed its role in the IPO auction at 11:11 a.m. on May 18, Greifeld said last week. Between then and 11:30 a.m., customers kept submitting cancellations and updating existing orders, putting Nasdaq’s systems into a “loop” and preventing it from opening the stock, he said.

The IPO valued the Menlo Park, California-based company site at $104 billion.