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After Its Busted IPO, Is Facebook Doomed?

Dan Caplinger
May 22, 2012

Shares of Facebook (Nasdaq: FB  ) were always destined for notoriety. But few investors expected the particular notoriety it now has.

Yesterday, Facebook joined the growing group of recent stocks that now trade below their initial public offering price. In the aftermath of a long-anticipated first day of trading that included only a modest pop at the open that quickly eroded to almost no gain at all, the social media star's team of underwriters chose not to defend its stock today from falling below its $38 per-share offering price.

Many analysts seem to think that yesterday's price drop is a death sentence for Facebook as a successful investment. Yet even amid the wreckage of a number of similar busted IPOs, Facebook should look instead to those examples of companies that overcame adversity to reach eventual success.

Why the doom and gloom?
Long-term investors may wonder why everyone's so convinced of Facebook's demise after just two days of trading. After all, the stock has traded for years on private exchanges, and the price action there has been quite impressive, with investors lined up to grab shares at ever-rising prices.

But now that Facebook has gone public, it brings up a whole new set of criteria to judge it by. And unfortunately, recent experience with stocks that fall below their IPO offering price has been almost entirely negative:

  • Zynga (Nasdaq: ZNGA  ) came public at $10 and traded as high as $11.50 before falling to close its first day at $9.50. Despite a short-lived rebound that took the shares to nearly $16 briefly after Facebook filed its IPO paperwork, the shares are now back in the single digits and riding Facebook's coattails downward.
  • Past social media offerings have seen similar fates. Renren (NYSE: RENN  ) got lots of hype as the Facebook of China and got a nice first-day pop, with shares offered at $14 and opening at $19.50 to trade as high as $24. But it didn't take long for the stock to drop precipitously, and you can now buy shares of the company for less than $5.
  • Even old, low-tech companies can be victims of busted IPOs. One example is General Motors, which emerged from bankruptcy with an improved balance sheet and went public in Nov. 2010 with a $34 offering price. Yet after a brief rise into early 2011, the stock finally gave groun