Facebook's (FB) recent sell-off upon its initial public offering stands as a reminder that the surrounding market uncertainty that has come to characterize the nascent social media sector has blurred the lines of what entails an opportunistic growth play. On Thursday, May 17, the company sold 421 million of its IPO shares to underwriters at $38 each. In total, Facebook raised $16 billion in a record IPO that was expected to have a well-received opening day. Yet a lackluster performance on Friday ultimately ended with underwriters coming in to support the share price. This negative sentiment was only further reiterated by the rampant sell-off that occurred on Monday, May 21, in which Facebook's shares trimmed 11% off of the previous close to end the day at $34.03.
In all fairness, the company's hype had been bolstered along the way. Mispriced IPOs found in LinkedIn (LNKD) and Yelp (YELP) did all but signal to underwriters that the public was thirsty for much higher valuations than they themselves believed to be rational. By the end of their first days of trading, LinkedIn was valued 109% higher than its IPO price and Yelp traded 63% higher than its own IPO price, respectively. Such companies were well understood to be feeding off of the anticipation of Facebook's inevitable IPO, the crown jewel in the this particular industry space.
Yet the dashed hopes in Facebook's opening day did more harm across the sector than one might have initially expected. Presumably linked to Facebook's dry opening day, the following companies also carried significant losses on May 17:
|Company Name||Closing Price||% Loss|
Of particular note is Renren, who's model is perceived as a Facebook clone operating in China. The large haircut to its shares on Facebook's opening day suggests that investors have become overall spooked by the loss of momentum in the social media sector. Yet even as Facebook priced slightly above its IPO price on May 17, these negative corollary performances stand as an ominous sign that the social hype party might be entering into its waning hours.
With all the cards now out on the table (especially the Facebook wild card), investors are sure to analyze these companies ever less on the basis of market sentiment and more so on the basis of fundamentals. All of these companies continue to trade at very high multiples off of their future earnings, and for their own part, Renren and Yelp have yet to even make a profit. With Facebook's IPO reputation coming in well below the hype's anticipation, those reading the wind would do well to wonder what this could mean for the rest of the sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.