Facebook called ‘falling knife,’ shares drop again

Shares of Facebook tumbled again on its third day of trading which led to one analyst calling the stock a "falling knife." After falling 11 percent on Monday the stock fell another 8 percent today despite positive views for the company. Experts are blaming the underwriters for advising to issue so make shares.

By Benjamin Pimentel
May 22, 2012, 3:28 p.m. EDT
Market Watch

SAN FRANCISCO (MarketWatch) — Shares of Facebook Inc. tumbled again on Tuesday in its third day of trading, prompting one analyst to call the stock a “falling knife” even as he maintained an upbeat view of the company.

Facebook’s FB -8.82% shares were last trading down roughly 8% to $31.30 in afternoon trades, after shedding 11% on Monday. The stock is now down about 18% from its IPO price of $38. Facebook debuted on Friday, closing with a 23-cent gain on its first day.

One analyst with a buy rating on the stock called Facebook “a textbook case of a broken IPO.”

“The institutional buyers don’t want to be left holding the stock as it slides, and individuals aren’t knowledgeable enough about the company to step in and catch a falling knife,” Wedbush analyst Michael Pachter said in emailed comments.

Pachter pointed to what he said were a host of missteps in Facebook’s launch.

“The company didn’t do a great job on the road show of reassuring investors that it has their best interests in mind, the underwriters did an exceedingly poor job of advising Facebook to issue so many shares, and the market simply is unprepared to absorb this much stock all at once,” he said.

He also criticized what he called an “information vacuum” on the stock and Facebook itself, noting that the company “unfortunately blocked research from all of the underwriters for 40 days following the IPO.”

“It is clear that institutions are feeling pretty dumb right now, and individuals are definitely not educated enough to act without having Wall Street reassure them,” Pachter said.

Despite Facebook’s sliding stock, Pachter maintained his buy rating on the shares. “I’ve done my homework, and am confident that the stock is worth $44,” he said.

On Monday, Facebook stock’s fall was so steep Nasdaq OMX Group Inc. NDAQ -2.06% , which operates the Nasdaq stock exchange, where Facebook listed its shares, issued an alert saying the stock had triggered restrictions related to shorting based on Securities and Exchange Commission rules, according to a report from Dow Jones Newswires. Read more on Facebook short-sale trigger.

The rule takes effect when a stock drops more than 10% from its prior day close, and aimed at preventing short sellers from trading the shares down even further after a significant intraday decline, the Dow Jones report said.

Facebook’s second day of declines also follows a media report that the consumer Internet analyst at Morgan Stanley, which was the lead underwriter for the Facebook IPO, had cut his outlook for the company’s revenue just days before the trading debut. Read story on Morgan Stanley's Facebook estimates.

The report from Reuters also said the move, which surprised some potential investors, followed an updated Facebook prospectus which warned about revenue-growth challenges by the ongoing shift to mobile devices. A Morgan Stanley spokesperson couldn’t immediately be reached for comment.

The report resurfaced worries about the limitations of Facebook’s business model.

The site is still mainly dependent on online display advertising, although doubts have been raised on how effective such ads are, underscored by General Motors Co.’s GM -0.45% announcement that it would stop buying Facebook ads.

Facebook must also wrestle with the shift to mobile advertising, an arena in which rival Google Inc. GOOG -2.75% , with its widely-used Android operating system, is dominant.

Google’s lead was underscored Tuesday when it announced that it had completed its acquisition of Motorola Mobility. In a release, the search giant said the acquisition “will enable Google to supercharge the Android ecosystem and will enhance competition in mobile computing.”

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