After IPO ballyhoo, Facebook stock losing value

NEW YORK - Facebook was supposed to soar. Instead, it plunged.

After the social network's stock fizzled on Friday in its long-awaited debut, its stock fell 11 percent on Monday, even as the rest of the stock market rallied.

The downward spiral has left some people sitting on big losses, and others scratching their heads. After all, nothing fundamental has changed at Facebook since the much-hyped company came to the stock market - Facebook still has more than 900 million users; founder Mark Zuckerberg, 28, controls the company; and it is still one of the few profitable Internet companies to go public.

Facebook's IPO - like Netscape's in 1995 and Google's in 2004 - was billed as a milestone moment. Netscape's offering ushered in the era of the Internet browser. The company's stock more than doubled in its first day of trading. Google's IPO heralded the age of search. It posted an 18 percent gain in its stock market debut. Facebook was supposed to offer proof that social media is a viable business and more than a passing fad.

But investors don't seem convinced. Facebook's stock closed Monday at $34.03, down 11 percent from Friday's closing price of $38.23. The investment banks that arranged Facebook's offering set a price of $38 on Thursday, and had to prop up the price throughout the first day of trading.

Facebook's lackluster price shouldn't have been a surprise. Some reasons:

■ Its IPO occurred the same week the markets posted their worse performance so far in 2012.

■ Europe is trying to avert financial disaster.

■ The public's love affair with the stock market continues to wane. People have yanked more than $400 billion from U.S. stock mutual funds since 2008.

■ Banks are being cautious.

"Regulators want banks to take less risk," said Larry Tabb, founder and CEO of Tabb Group, a market research firm. "To support a $100 billion offering can be challenging in this environment."

■ Investors were spooked by trading glitches at the Nasdaq stock market on Friday. Some people weren't sure if their trades had been executed and trading of the stock was delayed by a half hour.

"It was like trying to get a jumbo jet to take off in turbulent weather," said Kathleen Shelton Smith, principal Renaissance Capital, IPO research. "It's going to be a bumpy ride."

Facebook's continued slide may be a sign that investors are taking a rational look at the company's financial performance in comparison to its peers.

Though there are many ways to judge if a stock's price is too high or too low, one popular method is to compare it to earnings. The so-called price earnings ratio, divides a company's stock price by the company's annual earnings per share. A higher ratio suggests a stock is expensive because, in a sense, it takes more years of earnings for investors to get back they paid for it. A lower ratio suggests it is cheap.

By this logic, Facebook looks expensive compared to some companies. It is trading at 74 times its earnings in the past year, according to FactSet, a research firm. That compares with Apple at 13.7 times and Google at 18.6 times. The Nasdaq index of technology stocks trades at 20.8 times.

"There must have been some sober second thoughts about this," said Brian Wieser, an analyst at Pivotal Research Group who was first to come out with a "Sell" rating on Facebook on Friday.

It's not that he thinks the world's largest online social network is a bad investment. But at $38 per share, it's just too expensive considering the risks associated with Facebook's brief history and unproven advertising model, he says. His fair price, or "target price," is $30.

Shares of some related social media companies also declined Monday. Zynga Inc., which makes FarmVille, CityVille and Mafia Wars, and gets the bulk of its revenue from Facebook users, fell about 1 percent to $7.07. The stock hit as low as $6.36, its lowest level since the San Francisco company's December IPO. LinkedIn Corp., a network for professionals, dropped 1 percent to $97.99.