Hyperbole is very nearly the oxygen of the financial writer, and so it's surprising to see plenty of doom and gloom around Facebook (Nasdaq:FB) these days. The stock has very definitely underperformed since it went public, and the expiration of the first lock-up period (and potentially 271 million shares up for sale) may only make it worse. Whether Facebook goes down as the worst IPO ever is a story that is far from written, but investors would do well to pay attention to the lessons it has already offered.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

A Rocky Start
Facebook is not off to a great start as a public company. From its initial IPO price of $38, Facebook did trade as high as $45, but now stands at roughly 50% of its IPO price. This is problematic on multiple fronts. With the initial lock-up now expiring, it is not at all improbable that institutional investors will punt their shares, take their losses and move on to greener passages. It's also worth noting that this could get worse before it gets better - investors could look to close losing positions ahead of the next quarterly reporting period (window dressing) or before the end of the year to take the capital loss.

SEE: A Primer On Investing In The Tech Industry

What Did Facebook Do Wrong?
As is often the case with hot and heavily hyped tech stocks, Facebook hasn't necessarily done anything wrong on its own. The company's model is what it is, and investors made their own decisions about how to value that model. Along those lines, while Facebook might fairly be accused of not following the conservative mantra of "under-promise and over-deliver", I don't think it's fair to say that the company misled anybody about its model or short-term performance metrics.

Instead, I think investors are waking up to the reality of what Facebook is and what Facebook offers. Facebook users are not the customer, they are the product, and Facebook is basically just another company trying to build a business around internet advertising. As somebody who writes a lot for sites based around ad revenue, I can tell you that's not the easiest model. That said, the company has to prove that it has a model that can work as well on mobile platforms as it has to date on more traditional platforms.

It's also worth noting that the entire internet space has had its challenges this year. Groupon (Nasdaq:GRPN) and Yelp (NYSE:YELP) have been quite weak during Facebook's time as a public company, while Google has basically flatlined - all while the Nasdaq is up nearly 20%. Now you could argue that Facebook's struggles have pulled others down with it, but I think you can make an equally solid argument that downward earnings revisions at Groupon and Yelp reflect a tougher operating environment (even allowing for the clear differences in business models and markets).

It's Not Over Yet
Facebook's debut has been unimpressive, but the question remains whether anybody will care in another year (or five ... or 10). After all, the stocks of well-known tech companies like Google (Nasdaq:GOOG) and VMware (NYSE:VMW) had their initial challenges, and Vonage (NYSE:VG) was practically a case study in how badly wrong an IPO can go. Said differently, it is a mistake to talk about Facebook as belonging to the same group as Pets.com or Webvan - companies that went public with terrible business models, which flamed out when they could no longer go to the market for additional capital.

SEE: The Biggest IPO Flops

There are risks that Facebook will see pushback on ad pricing, revolts from users on more obvious revenue generation attempts, and perhaps just a general staling of the whole experience. But it's not as though this is a reproduction of the 2000-era Underpants Gnome internet company business model (Step 1 - acquire customers/users; Step 2 - ???; Step 3 - profits!).

The Bottom Line
To be very clear, I'm not trying to make the case that Facebook's post-IPO malaise is unfair or that the stock is somehow now a great bargain. I don't believe that for a second. Rather, I believe that the frothy stories about whether Facebook marks the end of the social media bubble (if there was one) and/or is the "worst IPO ever" are more targeted at generating clicks than offering any explanation as to what's going on at Facebook and what could be in store.

I think Facebook will continue to find success in monetizing its user base and faces little immediate threat from rivals like Google. With time, I also believe that investor expectations will become more rational, and the price on Facebook shares will settle down. In the meantime, though, I expect these shares to remain highly volatile - as any hint of good/bad news will energize a fierce tug-of-war between investors who think Facebook is the latest greatest play on an emergent tech trend and those who believe valuation always matters in the end.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!