Facebook’s shares fell again on Tuesday, leaving them down more than a quarter from Friday’s highs as questions mounted over the company’s financial prospects and its ability to grow fast enough to live up to the hype surrounding its stock.
After Friday’s nearly flat close and Monday’s 11 percent plunge, the stock dropped as much as 9 percent in early trading on Tuesday before reversing some of the decline.
Facebook shares were down 4 percent at $32.70 just after midday. Volume was again heavy, with more than 66 million shares traded. That followed turnover of 168 million shares Monday and 581 million on IPO day.
“There was a quick rush to exit yesterday, and when it broke the deal price it became self-fulfilling that there was going to (be) additional pressure. That’s continuing today even though there’s no real news on it,” said Michael James, a senior trader at regional investment bank Wedbush Morgan in Los Angeles.
Investors were still shaking their heads over the botched opening trading of Facebook when Reuters reported late Monday that the consumer Internet analyst at lead underwriter Morgan Stanley cut his revenue forecasts for Facebook in the days before the offering.
JPMorgan Chase and Goldman Sachs, which were also underwriters on the deal, each revised its estimates during the road show as well, according to sources familiar with the situation.
One mutual fund source said they had never, in a decade of experience, seen an underwriter cut a company’s outlook during the road show prior to an offering.
Brokers, who over-ordered shares expecting supply would be limited, continued to complain they received too much stock to handle. Meanwhile some retail investors were already consulting lawyers.
As bad as the declines have been, a view persists that the stock remains overvalued.
With Monday’s closing price of $34.03, the market implied a 24 percent annual growth rate for earnings over the next 10 years — a rate that would rank above 90 percent of the companies in that industry.
Thomson Reuters Starmine, meanwhile, more conservatively estimates a 10.8 percent annual growth rate, which would value the stock at $9.59 a share, a 72 percent discount to its IPO price of $38.
Similarly, the company’s price-to-earnings ratio remains lofty, even after the selloff. The $34.03 price implies a forward P/E of 59, compared with Google’s 13.3 forward price-to-earnings ratio (for a similar rate of growth).
Investors said the challenge for the young company is to prove it can grow aggressively, to justify its lofty valuation and demonstrate its maturity.
“Wall Street is a severe taskmaster and they’re going to want to see quarterly results, then guidance, then subsequently they’re going to want to see that guidance beaten, and then the guidance raised,” David Rolfe, chief investment officer of Wedgewood Partners, said on Monday evening.
Besides the pressure on Facebook, there is also an intense focus on Nasdaq, which has shouldered much of the blame for trading failures last Friday. The exchange has already set aside money to compensate customers, but some on Wall Street are warning its ability to snag future big IPOs is at risk.
Barry Ritholtz, a widely followed financial blogger and the chief market strategist at Fusion IQ in New York, took all sides — Facebook, Morgan Stanley and Nasdaq — to task in the sharpest terms on his blog Tuesday.
“Thus, what we see are a series of bad decisions made by Facebook’s executives going back many years. The insiders got greedy, too clever by half, in how they used secondary markets. They picked a bad banker and an awful exchange,” Ritholtz said.