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Facebook IPO: More whimper than bang

(MoneyWatch) After all that hype, Facebook (FB) shares were up only modestly in the first few hours of trading. The biggest ever initial public offering by an Internet company was delayed for half an hour due to a glitch at the Nasdaq exchange, while eager crowds of gawkers outside the exchange's Times Square storefront waited for the open.

With Facebook co-founder and CEO Mark Zuckerberg ceremoniously -- and virtually -- "ringing" the bell on the Nasdaq Stock Market from the company's Menlo Park, Calif., headquarters, Facebook's stock opened around $43 and quickly slipped to under $39, after pricing on Thursday at $38 a share.

The offering, which raised $16 billion for Facebook, caps a meteoric ascent for the company, which Zuckerberg famously launched from his Harvard University dorm only eight years ago. Since then, and despite its fair share of hiccups and persistent questions about the company's long-term growth prospects, Facebook has grown into a global communications platform with more than 900 million users, or roughly 1 in 8 people on Earth.

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For Facebook, the IPO is transformative in several ways. For one, the company's $104 billion valuation means it is officially a corporate heavyweight. The offering is the second-largest in U.S. history, ranking just ahead of General Motors' 2010 IPO, which raised $15.8 billion, and behind only Visa's (V) $17.9 billion deal in 2008. Facebook also already eclipses the market capitalization of established tech titans such as Cisco (CSCO) and Hewlett-Packard (HPQ).

Perhaps more important as the company evolves, Facebook must now face the glare of operating as one of the highest-profile public companies in the world. A key question is how Facebook's management, and particularly Zuckerberg, will cope with the grind of satisfying investors quarter after quarter, along with the pressures of conforming with securities law.

As even Zuckerberg concedes, Facebook is hardly the finished article as a business. Doubts remain about the sustainability of its business model, which for now remains almost entirely dependent on revenue from online advertising. Sales have slowed in recent years, and as users migrate to mobile platforms, it's less clear how Facebook will convert "likes" to cash. 

The fragility of its approach was underscored last week when General Motors (GM) revealed that it planned to stop advertising on Facebook. By some key financial measures, Facebook also compares poorly with other Internet companies. In 2011 it generated an average of $5.11 in revenue per user, for instance, versus $30 for Google. Facebook shares are also expensive relative to its $3.7 billion in annual revenue. Based on the IPO's $38 opening price, Facebook's stock is valued at roughly 20 times its projected sales this year, compared with a price-to-sales ratio of six for Google.

Zuckerberg's tight control over the company -- before the IPO he owned roughly 57 percent of Facebook's voting shares -- also has raised eyebrows over the firm's corporate governance. Yahoo's (YHOO) descent in recent years and ongoing management turmoil highlights an axiom in the corporate world -- over the long-term, entrepreneurs are often ill-equipped to run large public companies. In that regard, Zuckerberg's youth and inexperience leading a highly visible public company may count against him.

Beyond instantly turning a number of Facebook employees into millionaires and billionaires, the IPO was expected to boost investor demand for startup companies going public. The hope in Silicon Valley and other tech meccas around the country is that the offering will stimulate interest in smaller technology companies looking to enter the public markets. But if Facebook has a poor showing, those hopes may go unfulfilled.

Meanwhile, the market for these stock offerings has been recovering on its own. In the first quarter, a total of 44 IPOs raised $5.8 billion in proceeds, a 33 percent increase over the year-ago period, while a growing number of companies are queuing up to go public, according to PricewaterhouseCoopers. That pipeline includes a wide range of businesses, with particular strength in the high-tech, industrial, and financial sectors, said Henri Leveque, leader of PwC's U.S. Capital Markets and Accounting Advisory Services.

What the IPO market has missed is, well, Netscape. Even more than Google's (GOOG) 2004 IPO, the Web browsing company's 1995 offering kicked off the Internet boom and helped validate the online sphere as a place where companies can make money, and lots of it. 

More recently, well-known tech companies including daily deals firm Groupon (GRPN), professional social networker LinkedIn (LNKD), and social-gaming player Zynga (ZNGA) have staged IPOs. But the results have been mixed at best, underscoring a reality that transcends the hubbub around Facebook's offering: As investments, most IPOs don't pay.

Even for the venture capital investors who pour money into startups in hope of eventually taking them public, the average return is negative, notes investment adviser Larry Swedroe, a MoneyWatch blogger and director of research for The Buckingham Family of Financial Services. 

For now, the history of IPO performance hasn't dampened the excitement of retail investors, who are treating Facebook's launch today more as a touchstone cultural event than a stock offering. But as illustrated by Yahoo's woes as well as the demise of Netscape, which was bought by AOL in 1998, the corporate graveyard is full of companies that shined for a while before succumbing to mismanagement, technology shifts, and changing sensibilities.

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