On Tuesday, investors learned that the social-network company's banks sent conflicting signals ahead of Facebook's debut. Meanwhile, Nasdaq continued to analyze the problems it had with the IPO Friday, and lawsuits started to get filed. All of which came as Wall Street continues to debate how to value the hugely popular--but still young--social-media company.
The result left Facebook's stock at $31, near its low for the day and off 18% from its initial price of $38, furthering criticism over the size and execution of Facebook's public debut. The company, which initially was valued at $104.1 billion, is now worth about $84.9 billion.
In after-hours trading, Facebook shares fell further, dropping 25 cents to $30.75.
According to people close to the deal, lead IPO underwriter Morgan Stanley (MS) and fellow underwriter Goldman Sachs Group Inc. (GS) updated their financial projections for the Facebook after the company earlier this month added warnings to its IPO prospectus about how its mobile user base is increasing faster than the amount of advertising it delivers.
Underwriters are barred by Securities and Exchange Commission rules from publicly issuing research on the IPOs in which they are involved, but analysts are allowed to discuss their views with clients during IPO road shows. The analyst revisions were previously reported by Reuters, which also cited underwriter J.P. Morgan Chase & Co. (JPM) as having revised its estimates.
On May 15, Facebook's expected offer price was raised to between $34 and $38 a share before eventually pricing at the high end of that range.
Analysts called the combination of those two moves unusual. Hudson Square Research analyst Daniel Ernst said the move "created an unnatural dynamic" for the stock that "disconnected it from the fundamentals."
The exact date of the analyst revisions wasn't clear, the people said, although they were changed soon after Facebook updated its prospectus on May 9, about a week before the offering priced.
Meanwhile, Nasdaq OMX Group Inc. (NDAQ) Chief Executive Bob Greifeld on Tuesday acknowledged "mistakes" made by the exchange in its handling of the Facebook IPO. He reminded investors that the deal was the largest ever in terms of valuation at the time of an IPO and that the opening trade in Facebook's stock was the largest Nasdaq OMX had ever managed.
After initial delays in the opening of the stock Friday, a flood of canceled orders for the stock and changes to pre-existing trades interfered with Nasdaq OMX's process of matching up buy and sell orders to form the first trade, executives have said.
Confusion over the size of investors' positions is said to have contributed to Facebook's selloff Monday as some shareholders realized they had larger stakes than they wanted.
On Tuesday, a group of investors seeking class-action status sued Nasdaq, accusing the exchange of mishandling the "hotly anticipated" IPO, which resulted in trading losses as Facebook share prices fluctuated wildly throughout the day.
"Nasdaq failed to process some trade orders for hours on end, and failed to cancel other orders despite customer requests to do so," according to the lawsuit, filed Tuesday in U.S. District Court for the Southern District of New York.
Nasdaq didn't comment on the lawsuit, though an official told customers Tuesday afternoon that the exchange would have pulled the plug on Facebook's IPO had it known the full extent of the technical problems that plagued its systems.
Nasdaq said it can't promise customers they will be compensated for losses due to its IPO system failures.
Separately, a Los Angeles-based law firm filed a lawsuit against Facebook and the IPO's underwriters. The suit seeks class-action status on behalf of investors who suffered losses in connection with the IPO.
The firm, Glancy Binkow & Goldberg LLP, alleges--among other things--that the offering materials provided to potential investors were negligently prepared and failed to disclose material information about Facebook's business, operations and prospects. A Facebook representative wasn't immediately available for comment.
Facebook shares bounced off their lows mid-Tuesday, though that did little to calm investors who remain frustrated with how the IPO was handled. The uproar added to confusion over how to judge a company whose future earnings remain uncertain.
Valuing the social-media giant "is more art than science at this stage of its development," said Richard Greenfield, analyst at research firm BTIG.
Susquehanna Financial Group analyst Herman Leung said Facebook's stock still faces pressure from a misallocation of shares during its "sloppy offering" last week.
"Options start trading on Tuesday [May 29], so we should see a lot of color," Leung said. "I think it's going to be a choppy ride." Susquehanna gives the stock a positive rating with a $48 price target.
Also adding to the stock's volatility is a push by some investors to short the stock. When investors short stock, they borrow shares and then sell them. Shorting is a bet that share prices will fall, allowing the stocks to be repurchased and replaced later at a lower price for a profit.
Facebook's recent IPO makes it harder to purchase stock to short; however, reports from the Financial Industry Regulatory Authority indicate that 23.6 million Facebook shares were short sold on the New York Stock Exchange and Nasdaq combined, or about 5% of the total volume on the opening day.
Facebook's inability to say much after its IPO isn't helping matters, Hudson Square's Ernst said.
"There are people who want to own this stock and, in the long run, what's going on will look like noise," he said.
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