Question

Facebook's initial IPO found stock shares trading at 50% below their initial per share price. Management accountants analyzed costs and benefits of different courses of action to help improve the company's monetization. A few years later, Facebook was trading at three times its IPO price. Why did Facebook IPO not do well and price high in the beginning?

Answer 1

An Initial public offering (IPO) is when a private company first time offers its shares to the public and after that it’s trading starts in secondary market (stock exchange). For the Facebook IPO; the valuation of the stock was too high and it was not fully supported by the financial performance of the company. The underwriters of the IPO had set an offering price that was too high for the company. The company also has tried to sell too many shares to the market to raise more fund, may be the market was not ready to absorb it.

The success of Initial Public Offering (IPO) of the companies depends on many factors. Some are internal factors like right valuation and some are external factors like market sentiments. The companies do not have any control on external factors for example unfavorable market opening that particular day due to some major happenings in the world. Facebook IPO also faced that problem as some technical problem incurred at NASDAQ on the day of listing of stock and it increases the confusion among investors. But the worth of a company cannot be judged only by its IPO as we know that a few years later; Facebook was trading at three times its IPO price.