Facebook IPO on Nasdaq

On Tuesday, Facebook Inc (NASDAQ:FB) kicked off the new week with its shares dropping more than five percent and hitting new lows in the company’s brief tenure as a publicly traded company.

In the market’s first hour of trading, shares dropped below $30. Since going public on May 18 at $38 per share, the stock has seen about 21% of its value wiped away.

Adding some fuel to the fire is the Facebook’s entry into the options arena on Tuesday. According to Kaitlyn Kiernan of Dow Jones:

“Facebook options, like the stock in its debut, post impressive first day volume so far. Facebook looks poised to become one of the most-traded corporate options today, with a total of 17,232 options — 7,476 puts and 9,756 calls traded in the session’s first 15 minutes. Bank of America and Apple, which often vie for the largest daily options trading volumes, traded 15,697 and 50,518 options in the first 15 minutes, respectively.”

It’s been a bumpy IPO road for Facebook Inc (NASDAQ:FB) with the trading snafus and technical problems it incurred on Day 1 of  trading on May 18. But as the allure of its IPO dies down and the stock continues declining, the excitement around the stock has evolved into a gloomy story.

One answer? It could be attributed to behavioral finance.

Walter Zimmerman, senior technical analyst at United-ICAP, notes the following problems in the stock’s short trading history. He said to The Wall Street Journal,

From the vantage point of behavioral finance the unfolding Facebook IPO fiasco was neither an order flow glitch nor a technical error by the Nasdaq. Nor was the problem a simple share value miscalculation by analysts. All attempts to grasp the Facebook IPO face-plant in these terms is to deal the surface symptoms and to miss the underlying cause.

The Facebook debacle is a textbook case of the collision between human needs and the nature of the financial markets. What went so wrong with this IPO can only be appreciated in terms of the intersection of collective human behavior and finance. The mass psychology of this IPO was that of a classic mania. And that meant a multitude of problems were rendered invisible. We are referring here to two critical and related issues – the timing and the valuation assumptions.

Facebook doubters have been front and center in the last few days as their fingers have pointed at the company’s big valuation. According to FactSet Research, as shares trade at 52 times projected earnings for the next year, the stock continues to trade at greater multiple than its peers.

Zimmerman added, “What happened to the Facebook IPO? Human nature happened. Crowd behavior can be ugly and dangerous…I would like to suggest that Facebook may be a great signpoist, but not a great stock to own.”