Facebook's IPO in Painful Perspective

Shares in the social-media giant Facebook (Nasdaq: FB  ) have been public for more than two weeks now.

The bad news is that they're down more than 35% since opening at $42 on May 18. The good news is that things could have been a lot worse.

The underwhelming Internet IPO
Big-name Internet IPOs have performed abominably of late, recording an average after-market return of negative-28%, almost the precise return of Yelp (NYSE: YELP  ) , the online urban city guide.

The worst performer of the lot is Groupon (Nasdaq: GRPN  ) , which is down 62% since going public last November. To provide some context, over the past few months, the daily deals site has had to restate earnings twice, is under investigation by the SEC, and recently replaced two-thirds of its audit committee.

Not far behind are game-maker Zynga (Nasdaq: ZNGA  ) and Internet radio company Pandora Media (NYSE: P  ) , both of which are down nearly 50% after initially launching above their IPO prices.

Indeed, the only two high-profile Internet IPOs of the past few years to perform admirably are personal finance website Bankrate and Facebook's counterpart for professionals, LinkedIn. The former is up 28%, and the latter is up 11% from its IPO opening trades. If you were a LinkedIn investor who received an initial allocation from the IPO, you would have doubled your money by now.

Facebook is consequently just one among many disappointing Internet IPOs -- neither the best, nor the worst:

Company

First Day Return

Two-Week Return

Total Aftermarket Return*

Total IPO Return**

Bankrate 10% 18% 28% (7%)
LinkedIn 14% (5%) 11% 84%
Yelp 12% (1%) (28%) 47%
Average (6%) (14%) (28%) 49%
Facebook (9%) (34%) (36%) 11%
Zillow (37%) (52%) (43%) 185%
Zynga (14%) (14%) (44%) 10%
Pandora (13%) (13%) (47%) 25%
Groupon (7%) (12%) (62%) 40%

Sources: Yahoo! Finance and Renaissance Capital.
*The total after-market return is calculated using the opening price per share on the first day of trading.
**The total IPO return represents the difference between the IPO price per share and the opening share price on the first day of trading.

Learning our IPO lesson
If there's one lesson we can take away from Facebook's IPO debacle, it's this: As a general rule, most, if not all, value is extracted before any shares ever trade on an exchange.

In every instance but one, the opening price exceeded the IPO price by an average of 49%. And in every instance but two, the subsequent return to retail investors has been negative, down an average of 28%. The spread between returns is a jaw-dropping 77%.

Thus, do yourself a favor and think about this the next time you're tempted to buy into the next big IPO.

Foolish bottom line
If you bought into the Facebook IPO and are looking for a better Internet name to buy, check out our latest free report, titled "Forget Facebook -- Here's the Tech IPO You Should Be Buying." Inside you'll learn about a company on the list above pursuing revenue growth through multiple channels. Claim a copy of this limited-time special free report today.

Fool contributor John Maxfield has no financial interest in any of the companies mentioned above. The Motley Fool owns shares of Facebook, Zillow, and LinkedIn. Motley Fool newsletter services have recommended buying shares of LinkedIn and Zillow. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 07, 2012, at 1:36 AM, Hestheone wrote:

    More Motley Fool touting of Facebook? Who was it who managed a positive IPO return? Certainly no retail investor who bought on opening day was able to sell it at a premium. Maybe some insiders managed to run and dump. but to pretend that FB was not a total disaster for just about everyone who did not get free stock is just plain nonsense.

  • Report this Comment On June 07, 2012, at 10:36 AM, JohnMaxfield37 wrote:

    Hestheone -

    The article refers to the Facebook IPO as a "debacle."

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