No Pop Equals a Flop? Welcome to the Irrational World of Public Markets, Facebook

By Erin Griffith , written on May 18, 2012

From The News Desk

Disappointing. Dud. Lackluster. Underwhelming.

Facebook shares didn't blow up like pretty much everyone thought they would. (And stop saying you told us so, it's too easy to be a nay-sayer.) Because no one managed our fragile, sky-high expectations, we are sorely let down. At least, that's how most financial coverage has painted the IPO.

There are logical explanations for why Facebook's stock didn't skyrocket to $75 a share. These explanations have little to do with whether Facebook is a good investment, be it at $35, $38, or $75. They have to do with Nasdaq and bankers. And yet, because the share price didn't pop, the historic, record-breaking IPO of eight-year-old Facebook is a flop. This response is totally irrational, a new reality the merry band of "do-it-our-way" coders at 1 Hacker Way can't be too comfortable with.

Facebook, more than any Web 2.0 company, doesn't give a crap what others think. It doesn't have to. Zuckerberg has played the Howard Roark role for years, refusing to replace himself with a corporate CEO, refusing to give up his controlling stake and board votes, refusing to compromise his vision for short term revenue rewards.

It was clear in his statements earlier today: "Our mission is not to become a public company. Our mission is to make the world more open and connected." In other words, this whole IPO thing is an annoying distraction, a necessary evil. You could argue that Facebook has been public for two years thanks to SecondMarket, but that wasn't nearly this liquid, nor was it as regulated or obsessed over.

Now, with quarterly earnings, shareholder meetings, and analyst ratings, Facebook's value and success will rely on investors' often irrational perceptions of the company.

There's plenty at stake. With each one cent fluctuation of Facebook's stock price, Zuckerberg probably loses and gains something like $50 million. From here on out, his and Facebook's worth will oscillate with each missed earnings expectation, no matter how little something like earnings expectations have to do with a company's actual value as an investment.

Today's situation was a perfect example. For starters, Nasdaq screwed it up. First the delay, then the failure to tell investors their trades had cleared. It was a mess, just short of the BATS disaster that led the alternative trading platform to pull its own IPO.

Beyond that, the bankers overestimated demand. They tried to make up for it by sopping up shares all afternoon as a way to keep prices from slipping below its listing value of $38 a share. Some speculate it would've risen on its own, had Morgan Stanley, et al. not done that. Others say the banks were doing Facebook a solid by saving it the embarrassment and negative market signal of closing down. Regardless, with 421 million available shares, there was enough Facebook to go around that it was never bid up. (Take, on the other hand, LinkedIn, which floated just under 8 million shares, saw them double on its first day of trading, and was viewed as a raging success!)

And now, thanks to the bankers' "38 Special," Facebook risks a big selloff on Monday morning. The banks don't have to keep propping the stock price up, and they probably won't.

Irrationality is the nature of the game now. It happens to a smaller degree with venture-backed startups, where, month to month, you're timing the hype cycle, always either wildly undervalued or wildly overvalued, but never "priced to perfection," as many have referred to Facebook today. (Priced to perfection equals bad, apparently.) Unlike startups on either end of the valuation pendulum, Facebook is neither an on-fire darling or a washed-up has-been. It's too big to be an underdog but too young to be old guard. It's a historic, record-breaking, high-growth, high-margin money machine, and it's a big fat flop. Welcome to Wall Street, Facebook.