SAN FRANCISCO (Reuters) - The historic initial public offering of Facebook Inc (FB.O) did not go as planned on Friday, as the social networking company's sky-high valuation combined with trading glitches left the stock languishing near its offering price at the market close.
Facebook shares, which opened up 11 percent, closed at $38.23 after a nail-biting last half hour of trading when the shares dipped to their $38 IPO price. Most investors had predicted a first-day pop.
More than 576 million shares changed hands, setting a trading volume record for U.S. market debuts.
The company had priced its IPO at the top end of its target range and increased the size of the offering, becoming the first U.S. company to go public with a valuation greater than $100 billion.
Facebook founder and Chief Executive Mark Zuckerberg, 28, who retains voting control of the company and whose personal net worth is now about $20 billion, marked the debut of his company's shares at the company's Silicon Valley campus, symbolically ringing the opening bell for stock trading on Friday morning.
Wearing his trademark black hoodie, Zuckerberg hugged and high-fived Sheryl Sandberg, Facebook's chief operating officer, who is credited with bringing crucial business discipline to a company founded in a Harvard dorm room eight years ago.
The area outside Facebook's offices was packed with throngs of photographers, more than a dozen television trucks, and a TV news helicopter hovering overhead.
Outside of Nasdaq headquarters in New York, crowds also gathered, even as exchange officials struggled to sort out technical problems related to the huge volume of orders, which delayed the start of trading in the stock by 45 minutes and left investors guessing for more than two hours about whether their buy and sell orders had actually been executed.
The shares attracted interest from investors of all stripes, reflecting the social network's extraordinary growth and deep store of information about its 900 million users.
The IPO minted thousands of new paper millionaires among Facebook's 3,500 employees -- and a handful of billionaires among its founders and early investors.
But the stock debut took place in a weak market, and traders said the smaller-than-expected first-day pop reflected the very aggressive pricing of the offering and a last-minute, near 25 percent increase in the number of shares being sold. Analyst predictions of first-day gains had ranged from 10 percent to 50 percent.
"The increase in size was a big negative factor for us," said Tim Ghriskey, chief investment officer at Solaris Asset Management, who said he canceled some orders for the shares.
The IPO price was equivalent to more than 100 times historical earnings, compared with Apple Inc's (AAPL.O) 14 times and Google Inc's (GOOG.O) 19 times. For many investors that made it a risky bet.
"We have got some unhappy guys out there," said Wayne Kaufman, chief market strategist at John Thomas Financial, a retail broker on Wall Street. "They were hoping for Facebook to be considerably better. I bet there are a lot of disappointed people in the market."
Market participants said that in the final run-up to the IPO, much of the demand was from retail investors rather than institutions. When the stock fell to $38 on Friday morning, traders say the IPO's lead underwriter Morgan Stanley stepped in to prevent the price from slipping below the IPO level.
From Facebook's perspective, a small increase in the stock showed it was priced perfectly for Zuckerberg and early investors, who pocketed maximum gains and left little of the easy money on the table.
"You want to price the offering correctly. Institutional buyers get a little bump and the company raises the right amount of money," said Kevin Hartz, co-founder and CEO of Eventbrite, an online ticketing startup that is integrated with Facebook's platform. "If the stock has a massive bump on day one that means you misread market demand and company does not raise the right amount of money."
BATTLE OF THE GIANTS
Facebook faces many challenges as it takes its place beside Google, Apple and Amazon.com Inc (AMZN.O) as one of the giant public companies defining the next-generation Internet economy. Google in particular views Facebook as a mortal threat and is moving aggressively to integrate social networking features across its products.
At the same time, scores of young companies are building new products and services, in some cases on top of the Facebook platform and in some cases in competition with it, and attracting huge amounts of investment capital.
A handful of such so-called Web 2.0 companies, including Zynga Inc (ZNGA.O), LinkedIn Corp (LNKD.N), Yelp Inc (YELP.N) and Groupon Inc (GRPN.O), have already gone public, and others have been acquired by the industry giants.
In a sign of the volatile nature of highly valued Internet stocks, all these shares fell on Friday in sympathy with Facebook's weaker-than-expected debut. In particular, social gaming company Zynga, which relies on heavily on Facebook and also provides more than 10 percent of Facebook's revenues, fell by more than 14 percent.
In an indication of the land grab now under way in the Internet world, Facebook in April spent $1 billion to acquire Instagram, a tiny photo-sharing company with lots of users but no revenue. A Facebook rival, social scrap-booking site Pinterest, raised money earlier this week at a valuation of $1.5 billion in a sign that venture capitalists and other private investors still see enormous potential in Web 2.0 companies.
Facebook's formidable assets include 900 million users around the world, many of whom spend hours a day on the site and share enormous amounts of personal information. That in turn enables Facebook to target its advertising to peoples' specific interests, and many analysts believe the huge store of personal information gives Facebook an advantage that Google and other cannot match.
"Literally everything you see on the Internet, you could see inside Facebook -- but done with much more of the social graph built into it," said Siva Kumar, CEO of e-commerce company TheFind. "In a way they operate the mall, and everybody in the mall will pay some way or the other to Facebook."
Facebook posted $3.7 billion in revenue in 2011 and $1 billion in profit. Analysts say the company has untapped opportunities in mobile computing, and potentially other Internet services such as email and search. Zuckerberg, though unproven as a public company CEO, is widely admired as a product visionary who has done a masterful job in continually improving the Facebook experience.
Skeptics, though, note that only a small percentage of Facebook users respond to advertising on the site. Google retains a big advantage in that regard, because advertising related to specific Internet searches is by nature far more relevant and thus more valuable.
In a sign of the challenges ahead for Facebook, the nation's third-largest advertiser, General Motors Co (GM.N), said last week that it was canceling its paid advertising on the site.
Global Equities analyst Trip Chowdhry said the stock debut was "lackluster" because Facebook's growth prospects do not justify a high stock valuation. "They have serious technology and business model problems. Facebook is overhyped and drinking its own Kool-Aid," he said. "They are only getting $4.39 per user per year. Google gets almost $30 per user."
In Silicon Valley, though, the conventional wisdom is that Facebook and its social media brethren will be an increasingly important force in the business world for many years to come.
Already, the influx of wealth arising from Facebook's extraordinary growth has helped drive a mini-boom in San Francisco Bay Area real estate, and income tax revenues related to the IPO will cut the state of California's budget deficit by an estimated $2 billion.
(Additional reporting by Edwin Chan in San Francisco, Yinka Adegoke, Ed Krudy and Olivia Oran in New York; Editing by Jonathan Weber, Steve Orlofsky and Tiffany Wu)