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Facebook Wins Few Friends After Rough First Day of Trading

Friday, 18 May 2012 03:49 PM

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The emblematic social-networking site Facebook went public on Friday after being priced at $38 a share, which valued the company at $104 billion, making the initial public offering one of the largest in history.

Facebook shares rose 23 cents, or 0.61%, to close at $38.23. So was it worth it?

Not really, experts say, pointing out that while Facebook isn't a fundamental disaster, its shifting and often unclear business model makes the company unworthy of all the hype.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

Furthermore, Facebook's revenue doesn't support such a high valuation, plus the verdict is still out on how it will keep generating top-line growth down the road.

There may be 900 million Facebook users sharing anything from childhood photographs to political opinions on their Facebook pages, but monetizing the site will prove to be difficult.

General Motors, the third-largest advertiser in the U.S., just pulled the plug on paying for Facebook ads and smaller companies have noticed what many were afraid they'd see: lots of exposure but little results.

"You are taking a hell of a gamble valuing a company as much as Hewlett-Packard or Cisco but with declining revenue — and when the third-largest advertiser just announced it's not using Facebook," Bob Wiedemer, author of New York Times and Wall Street Journal bestseller "Aftershock" and Managing Director at Absolute Investment Management, tells Moneynews.

"I like Facebook and I think it's interesting and I think it's a great company — but I think the valuation is ridiculous."

Other noted investors are pointing out similar trends.

"There isn't to me a lot of compelling functionality to Facebook," Christopher Whalen, Senior Managing Director of Tangent Capital Partners in New York, tells Moneynews.

"I just don't know long-term what the real drivers of Facebook are going to be. It's certainly gotten a lot of attention and a lot of hype but I just don't know what the business model is."

Smaller and more niche-focused Internet companies can charge for their services and grow from there, which Facebook is reportedly experimenting.

Already in play in New Zealand, Facebook's new Highlight service makes sure posts don't get lost in the site's streaming news feed, as for about $1.50 a post, the company will ensure a user's friends see the posts.

But big companies like Facebook, which rose on the concept of free services, won't pull such a plan off.

"At the end of the day I still think this is a very speculative, short-term phenomenon on Wall Street, and I think six months from now Facebook is going to be in the same place as many other dot.com stories, which is once the hype has gone, the opportunity to make money by flipping the stock after the offering is gone," says Whalen, who adds he prefers big companies like Google that provide usable tools like email and other services.

"I just don't know what the drivers are going to be."

Others agree Facebook will battle headwinds if it follows the path of charging for its services or applications.

"If you want to be certain that your friends see something you have to say, why not just send them an email? Because charging you to ensure that your friends see your posts seems just like Facebook trying to charge you $1.50 per email," blogger Henry Blodget reports.

"We realize email is for dinosaurs (like us). But come on. $1.50 per post? That's 5 times more than the cost of a physical letter!"

It didn't take long for word to get out that Wall Street was a little cool to the shares, which received their first "sell" rating on Friday from Pivotal Research Group, which set a target price of $30 for the stock.

"We are wary of the disconnect between revenue growth and operating/capital expense growth expectations," Pivotal analyst Brian Wieser said in a research note, according to Reuters.

"The market is pricing Facebook as a less risky asset than Google, which we believe is simply not the case."

Some market watchers say they weren't surprised to see Facebook shares trade around $40 by midday Friday, not far from where it opened.

"Going into the IPO, there has been a lot of skepticism from investors, in particular institutional investors, questioning anything from whether the price of the stock is fair, to whether Facebook can successfully monetize and sell ads," says Chris Brown, manager of the Pax World Balanced mutual fund, which invested about $14 million acquiring private shares in Facebook on a secondary market before the IPO, according to the Associated Press.

"We're long-term investors. It's nice to have the stock up for one day, but it's only one day. It's hard to extrapolate much as to the future of the company."

Expect more ups and downs to follow as investors trade on a company with an evolving business model.

"You're going to see obviously an extreme amount of volatility over the next week as people evaluate the stock," Brown says.

"We have got some unhappy guys out there," Wayne Kaufman, chief market strategist at John Thomas Financial, a retail broker on Wall Street, told Reuters.

"They were hoping for Facebook to be considerably better. I bet there are a lot of disappointed people in the market."

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.



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