May 21 (Bloomberg) -- Facebook Inc., 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 Inc. 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 Residential. Today’s slump reinforces concern that the IPO was priced too high.
“Investors are clearly recognizing the risks embedded in the stock,” said Brian Wieser, 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 Gaskins, 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 OMX Group Inc. Chief Executive Officer Robert Greifeld 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.
Facebook is trying to adapt as more users visit its site through mobile phones instead of the Web. That put pressure on company executives to articulate their mobile strategy as they marketed the stock to potential investors ahead of the IPO. Facebook has said it would add mobile advertising along with new ads to reach users when they log off the company’s website.
Facebook still faces hurdles in traditional Web advertising. General Motors Co., the world’s biggest automaker by vehicles sold, said last week it was halting display ads on Facebook, while maintaining brand-promotion pages.
Sales at Facebook, which makes most of its money from graphically based online ads, came in at $3.71 billion last year. That puts it below the top 50 U.S. technology companies by revenue. Google Inc., valued at almost twice as much as Facebook, reported $37.9 billion in revenue last year. Google jumped 18 percent on its first day of trading in 2004.
Facebook was the 11th U.S. consumer Internet company to go public in the past year, a stretch that began with LinkedIn Corp. With a valuation of $104.8 billion at the May 18 close, Facebook is worth more than three times the other 10 combined. LinkedIn, a social network for professionals, is second, valued at $10.3 billion.
“There are only so many people that are going to buy into a hyper-growth story,” said Michael Pachter, an analyst with Wedbush Securities Inc. in Los Angeles, who rates the stock outperform and doesn’t own it.
LinkedIn surged 109 percent last May after its IPO. Groupon Inc., the biggest daily-deal coupon site, began trading on Nov. 4 at $20 and rose 31 percent that day. Groupon’s shares closed at $11.58 on May 18.
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