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Was Facebook’s IPO a Big Flop?

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Why Facebook stock nosedived soon after opening

Facebook (FB) held its initial public offering (or IPO) on May 18, 2012, and nothing went well for the company. Three days prior to its market debut, the underwriting banks Morgan Stanley (MS), J.P. Morgan (JPM), and Goldman Sachs (GS) increased the IPO range, citing heavy demand. This didn’t go over well with some large investors who thought that Facebook was overpriced and that the IPO was “overhyped.”

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Moreover, Facebook also increased its number of shares by 25% to 421.2 million, which was indeed a bad move, especially in a situation when shares were considered overly priced. As a result, investors had more shares, which led to selling frenzy. The stock opening was delayed due to technical glitches, as NASDAQ’s electronic trading platform was unable to handle the high volume of trades. The stock soon fell after opening, and the share prices nosedived by more than 50% over the course of the next few months.

Adding to its woes, Facebook faced a number of lawsuits following its IPO. It was alleged that prior to the offering, Morgan Stanley and other analysts cut revenue estimates, which weren’t disclosed in Facebook’s S-1 filing.

Investors to judge

The IPO was considered a dud and the stock lost about $50 billion in value by August 2012. However, what’s important is that the company was able to raise $16 billion through the offering.

Undaunted by a lackluster stock performance along with lawsuits, Facebook’s ability to maintain and grow its user base and user engagement helped the company to attract and retain marketers and in turn generate profits. Moreover, if we compare Facebook’s IPO with Twitter’s (TWTR) IPO, Facebook recouped the loss in a couple of years while Twitter’s shares went the other way following its strong IPO.

To get portfolio exposure to Facebook, you can consider investing in the PowerShares QQQ Trust, Series 1 ETF (QQQ).

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