"It’s a learn-as-we go-along situation," said Ted Parrish, director of investments at the Henssler Financial Group, a financial planning and money management firm. "Facebook hasn't figured out a lot of its business model. So how can the market understand it before there’s some history -- especially a company that doesn't have recurring revenue?"
When Facebook debuted (to tumultuous trading), Morgan Stanley, the offering's lead underwriter, priced the company at $38 a share for a valuation of $104 billion. After a flat opening day, marred by a series of technical glitches at Nasdaq, the stock on its second day of trading fell 11 percent from its initial price. On Friday, the stock closed below $32, down 16 percent from its starting price.
The opening share price "should never have been that high," said Robert Enderle, a technology analyst and president of the Enderle Group, because Facebook's "popularity is not connected to a revenue stream."
Facebook's debut is not the first tech company IPO to perform well below expectations in recent memory. After months of trouble before Groupon staged its initial public offering (related to the company's accounting practices), the stock debuted in November at a price of $20 a share. Since then, the stock for the daily coupon site has dropped 40 percent in value and now trades at about $12 a share.
Social gaming network Zynga debuted in December at $10 per share, and its price took a nosedive almost immediately. To date, Zynga's share price has plummeted nearly 40 percent; the stock now trades at $6.61 a share.
The problem with some of these companies, according to Robert Peck, president of CoRise, a merchant bank specializing in startups, is that their business models are unproved. Facebook is a massively popular social networking platform, with a whopping 900 million users. But its users don't bring in the money; advertising does. In 2011, Facebook made $3.7 billion in revenue. That figure is expected grow to $5.6 billion in 2012, according to a report by research firm eMarketer cited by VentureBeat. But there are questions whether the growth can be sustained in coming years.
The question about Facebook's revenues has led some investors to file suit against the company and its Wall Street underwriters, including Morgan Stanley, Goldman Sachs and JPMorgan Chase, claiming that the banks reduced their estimates for Facebook's revenue growth without informing investors, according to Reuters. Morgan Stanley has responded that its communications with investors ahead of the IPO complied with regulations.
"Everyone’s still trying to figure it out -- from companies themselves, to industry, to Wall Street," Peck said. "Nobody truly knows the business yet." Facebook does have a viable revenue model, Peck asserted. In other words, he said, it's not a question of whether Facebook will be able to make money but how much.
For others, though, the hype about Facebook's IPO and similar offerings in recent months is eerily reminiscent of another era of tech-stock overconfidence.
"All the social networking properties fell below their issue price, which is indicative of a bubble," Enderle said. "This goes back to the dot-com years" in the late 1990s. "Everyone was going to make tons of money, but they had no idea how they were going to do it."