Market Overview

Facebook Now Down 5% As Investors Cut Losses


Facebook (NASDAQ: FB) shares are continuing to fall on Tuesday as the much-hyped IPO is starting to turn into a disaster for investors. At last check, FB was down another 5% to $32.27. The stock fell 11% yesterday and closed very close to flat on its opening day of trade, Friday. Reports indicate that one reason that FB did not close lower on its opening day was because underwriters Morgan Stanley (NYSE: MS), Goldman Sachs (NYSE: GS) and others were furiously buying the stock to keep it above the deal price. As Facebook continues to fall, these underwriters may be precluded from supporting the stock so as not to violate risk covenants.

Even worse, they may be forced to sell in order to prevent more losses. These banks are likely to catch heat from major clients who put in big Facebook orders in anticipation of flipping the stock at a profit. Given the size of the deal, a lot of major investors are now sitting on large paper losses as FB continues to trade lower. The company's valuation has been called into serious question and it has been reported that a Morgan Stanley internet analyst lowered his projected revenue estimates in recent days. Even with very optimistic revenue projections, FB still looks expensive.

As investors are saddled with losses, their inclination is going to be to sell the stock and wash their hands of the entire debacle. Furthermore, if the underwriters are no longer supporting the stock because of losses, there is little that will stem the slide other than a very compelling valuation. Since the FB underwriters did this deal at a premium valuation, it may, unfortunately, take awhile for FB to reach compelling levels.

In the case of Facebook's IPO, it is unlikely that many involved are happy with how things have unfolded. Large institutional investors and retail investors alike are now sitting on fairly substantial paper losses, the underwriters look like they botched the deal and likely have losses of their own, and Facebook itself has seen its highly anticipated market debut turn into a first-class disappointment.

Posted-In: News IPOs Intraday Update Movers


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