The Downfall in Facebook Share Price – Reasons and Possible Recovery Steps
At the third day, Facebook ended $31 per share, $7 less than its initial price on Friday, May 18. It was obvious that investors disliked Facebook, especially at this particular price. Now, the question arose that what price would the investors favor. The managing director of Equity Research Trip Chowdhury thought it to be something between $15-$18. $20 per share would also be a fair valuation.
In fact, Facebook scored a poor performance at the very first day. While Robert Greifield, the Nasdaq CEO, put the
blame on the software programs used on the trading, many experts identified Morgan Stanley as the main culprit. At Thursday night, he traded 421 million shares of the company but the trade request disturbed this sale process and tossed everything into a loop. Nasdaq had to interfere later to get the sale rolling.
However, the real shocking news came out at Tuesday, May 22, when a Reuter report revealed that the research analysts at the companyís lead underwriters ñ JP Morgan, Goldman Sachs, and Morgan Stanley had cut their earnings estimate of Facebook during the IPO roadshow of the company. It was leaked that the analysts did so because a Facebook executive, who was aware of the weak business model, told them to do so. This was highly unusual and generally made huge negative impact on stocks. This estimate cut had barred some potential investors to think twice about their investment decision and dampened their appetite for Facebook stock.
According to the latest news, the stock price was continuously going down and fell almost 10% lower on Tuesday, May 29, to $28.84. It was 24% off its initial IPO price. This continuous decline left some analysts to predict further drops in price. Some investors were apprehending that the price could go around $25.65 in the next four weeks.
Andreas Scherer, a former executive of the company, opined that the stock price point was too aggressive and the company put out too many shares. The outcome of it was the inflated stock price that made it hard for expert fund managers to invest in. besides this short-term issue, Scherer pointed out some long-term issues to. He said that the business model initiated by Facebook was not fully backed. The model still to be scaled to the numbers that the company needed to validate the $100 billion estimation.
Apprehension is circulating around whether Facebook will be able to handle this downfall in shares or not. Facebook is also experiencing a negative cash flow due to the cost of building data centers. Moreover, the effectiveness of Facebookís business of displaying ads is also put into question, especially among the users who use Facebook through
However, plenty of analysts are also there who see fall below $30 signifying prospect.