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Facebook IPO May Lead To Bigger Problems

|About: Facebook (FB), Includes: MS, MSFT, NDAQ, ZNGA

The world was watching on Friday. Facebook (NASDAQ:FB) was finally available to the public after months, even years, of waiting and hype. To say the IPO didn't go well might be an understatement. There were plenty of trading issues, and after hearing Thursday night that shares would begin trading at 11am, I shifted some of my morning plans to watch the event (and perhaps circus). Shares didn't start trading until 11:30 or so, and after starting up more than 10% to $42, quickly retreated. It was not a banner day for the social media giant. Friday is over, and the past is the past. However, Facebook's IPO may lead to bigger problems down the road. Here are just some that I can think of.

1. Poor performance spreads to other names:

Facebook's mediocre performance on Friday spread to many other names, and that could definitely continue going forward. Shares of LinkedIn (LNKD) dropped from a high of $109.50 to a low of $96.60, before closing down nearly $6 to $99. LinkedIn shares have been one of the better post-IPO social media names, but if Facebook cannot hold up, LinkedIn will surely drop in tandem. Zynga (NASDAQ:ZNGA), the company behind games on Facebook such as FarmVille and Words With Friends, dropped 13% on Friday, and were actually halted for a while after a sharp drop tripped a circuit breaker. Zynga shares are at a new low, and are down 55% from their high set in early March.

These are just two examples of how Facebook's poor performance spread through the sector on Friday. There are several others. These names are trading at very high valuations, so just the smallest piece of bad news will knock them down. I'm not saying that a bubble has burst yet, but I would have liked to seen a little better trading on Friday, and not just in Facebook.

2. Implications for the Underwriters / Exchanges:

We heard that when Facebook tried to drop below the $38 offering price, the underwriters, led by Morgan Stanley (NYSE:MS) started buying shares to prop it up. We know that the company put up 421 million shares for sale, but there is another 63 million shares that can be sold to cover over-allotments. If shares don't hold the $38 level, how many of those additional shares will be sold is a serious question.

But the larger implication is for the big banks, like Morgan Stanley, buying shares. Rumors were that Morgan Stanley was buying billions worth of shares, and it is unclear if they were able to sell any or all of it. If Facebook drops below $38 on Monday and going forward, we know that any of those bought shares will be held at a loss. JP Morgan (NYSE:JPM) just reported a huge loss because of a bad trade. I've heard discussions about Morgan Stanley losing a nice chunk of change on Facebook. That will not go well with shareholders.

Let's also not forget the role of the exchange in this whole process. NASDAQ (NASDAQ:NDAQ) saw many problems with trade executions and cancellations. There were so many problems that the exchange is planning on revamping their systems. It wasn't a glowing endorsement for the exchange, which had fought hard to get the Facebook IPO. The stock of the NASDAQ OMX Group fell more than 4 percent on Friday, erasing early gains. Hopefully, they can fix their flaws going forward, or they might see names like Facebook leave for the NYSE.

3. Retail investors really staying away:

Going into the IPO, we heard from many experts, Jim Cramer and the like, advising regular investors not to pay tons of money just to get their hands on some shares. It was wise advice for those that could not get into the IPO. If you bought shares on Friday, and are still holding them, there is a very good possibility you are holding them at a loss. That won't be a pleasing sign for investors.

But the implication is larger for the entire market. Many smaller investors have been on the sidelines over the past few years, not investing for a variety of reasons. Whether it was due to large losses in the financial crisis, lack of trust due to the flash crash, or just realizing that it can be extremely difficult to make money in a market like this, a ton of money has not been in this market, and trading volumes are low. Now, there was widespread speculation that many retail, or ordinary investors, could enter the market thanks to the Facebook IPO. Facebook would ignite a new revolution of investment.

Well, after Friday, I'm thinking that more people might stay away. If Facebook, a company that has gained 900 million users in less than a decade, can't get out of its own way, why should investors even bother? There comes a point where investors decide this market isn't for them. Losses are a big part of that, but when you see problems like exchanges not being able to handle trades, you get worried.

I had initially placed a limit order at $42 early Friday morning, but when I saw prices coming down before trading, I quickly cancelled the order, and didn't enter another. In fact, I heard that many traders avoided the name, whether it was due to poor performance or issues with confirmations and such. When professional traders are staying away from the name, why should people at home even bother trying to play it? It doesn't make much sense.

4. The increase of negativity:

Markets weren't exactly soaring into the IPO to begin with. Another round of problems in Europe had knocked the Dow down more than 800 points in just two weeks, and an early morning rally on Friday disappeared after Facebook's less than stellar day. Markets and investors are already on edge, and any more bad Europe news could easily take the Dow below 12,000 this week. US jobs data has not been wonderful either, and with the month coming to a close, the May jobs report will be eagerly awaited. Another bad monthly report would certainly trouble more than a few. Don't forget what I mentioned earlier about other names in relation to Facebook. What if Facebook is at $35 in a month? Where does that leave everything else?

Conclusion - Large issues do remain:

While the Facebook circus will have calmed down a bit after this weekend, it has left a trail of issues that will need to be resolved. Will shares hold the key $38 level, or will they start dropping, taking down an entire sector? What effects does that have on the underwriters, like Morgan Stanley, who appeared to have been actively buying shares to keep the stock price up? How will the exchanges deal with future large IPOs? Will retail investors further stay away from this market? Finally, do we now go back to focusing on troubles in Europe, which could extend the recent decline?

As I'm sure many will ask, I'll finish with my opinion on the name. At the moment, while I may cover Facebook in some articles, I will not be buying shares, or shorting them for that matter. I'm just going to stay away, and focus on the names that I have a better understanding of. I think that is the best thing to do, for all that may be involved. I would recommend that if you are looking to get in, do some research on the name, and I'm not talking about checking your friends' status updates over the past three weeks. I'm talking about whatever financial information you can get your hands on. If you want to get in, figure out a realistic purchase price that you can be comfortable with, and use a limit order to get those shares. Don't blindly throw a market order through just to say you are in the name.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.