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Facebook’s hot start turns tepid

Facebook stock’s first day merely holds its ground amid high expectations

EMMANUEL DUNAND/AFP/GETTY IMAGES

A giant screen in Times Square showed Facebook cofounder Mark Zuckerberg preparing to ring the NASDAQ exchange’s opening bell.

Eight years after Facebook Inc. was born in a Harvard University dorm, the social network’s stock defied the massive hype surrounding its debut as a public company Friday by hardly rising at all.

Launched at an opening price of $38, Facebook shares climbed to $45 in early going on the Nasdaq Stock Market, only to fall quickly and end the day at $38.23, up just six-tenths of a percent.

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“I think it’s a lackluster debut, but not really unexpected,” said Josef Schuster, founder of IPOX Schuster LLC, a Chicago trading firm. “Facebook is suffering from the fact that market risk has gone up” since the sell-off that has pushed the Dow Jones industrial average down nearly 7 percent since the start of May.

The stock might have fallen even lower, but Facebook underwriters were buying up shares to prop up the price, and prevent a weak showing from damaging the market for future initial public offerings, according to Peter Falvey, managing director at Boston investment firm Falvey Partners LLC. Lead backers for the Facebook offering included Morgan Stanley, JPMorgan Chase & Co., and Goldman Sachs Group Inc.

In Menlo Park, Calif., where Facebook is headquartered, 28-year-old company cofounder Mark Zuckerberg rang a bell to officially start the Nasdaq trading day at 6:30 a.m. Pacific time — 90 minutes before trading in Facebook stock was scheduled to begin. But a technical problem with transmitting orders delayed trading in the company’s stock for 30 minutes, which may have helped to unnerve skittish investors.

Facebook shares briefly reached $45 in early trading, up 18 percent, then quickly fell back, and spent the rest of the day trading in a narrow range.

Susan Kaplan, a financial adviser in Newton, said smaller investors were eager to buy $2,000 or $3,000 worth, but “my biggest clients, with millions of dollars in their portfolios, have utterly no interest.”

RICHARD DREW/ASSOCIATED PRESS

Curious bystanders outside the Nasdaq exchange Friday.

The underwhelming showing by Facebook shares may have dragged down the stock prices of other social networking companies. Shares in Zynga Inc., which makes video games that run on Facebook, lost more than 13 percent to close at $7.16; Groupon Inc., the social shopping service, fell 6.7 percent to $11.58; and business-oriented social network LinkedIn Corp. closed down 5.6 percent at $99.02.

Some investors had expected social network stocks to surge along with Facebook, but bailed out when its shares failed to soar, according to Falvey. “I think the Facebook IPO didn’t provide the pop that was going to give some uplift to all of the stocks that are related to it,” he said.

The offering was more of a success for Facebook’s early investors. The company had priced its shares Wednesday at $38, the high end of its previously projected range. The offering raised as much as $18.4 billion for the company’s founders and financial backers.

In that light, the slow start for Facebook’s shares may have positive long-term effects, said Shawn Kravetz, president of the Boston hedge fund Esplanade Capital. If the stock had soared, the shares would have been too expensive for many individual investors.

The modest rise in the stock’s price “was like Sully Sullenberger landing the plane on the Hudson,” Kravetz said. “It was very smooth, very well done,” and kept individual investors in the game.

One investor, Stas Gayshan of Wayland, didn’t plan to get rich off his Facebook stock. “I bought one share because I would like to have some more responsiveness from Facebook whenever I have trouble,” said Gayshan, chief executive of Space With a Soul Inc., which rents space to start-ups and nonprofits.

Facebook now carries a stock market value of $105 billion, greater than that of restaurant giant McDonald’s Corp. But McDonald’s generated $27 billion in revenue last year, and $5.5 billion in net income. Despite its 900 million users worldwide, Facebook generated just $3.7 billion in revenue — mostly from advertising presented to its online users — last year, and $668 million in net income.

That puts pressure on Facebook to generate more income per user. “We’ll probably see a more advertising-friendly Facebook post-IPO,” said David Gerzof Richard, a social media professor at Emerson College.

Facebook must also become more successful in delivering ads on mobile devices like smartphones and tablet computers, which are used by about half a billion Facebook subscribers, analysts said. Facebook recently bought the photo-sharing app Instagram for $1 billion, and plans more investments in mobile services.

“Mobile advertising is a huge space that is really up for grabs right now,” said Catherine Tucker, an associate professor of marketing at the Massachusetts Institute of Technology’s Sloan School of Management. “It makes sense that it could be a market that Facebook could dominate, but it also could be the case that Apple or Google could dominate it instead.”

Hiawatha Bray can be reached at bray@globe.com.
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