
The fascinating, overhyped build up to Facebook's IPO generates a number of observations and potential issues.
1. Facebook was overvalued at its IPO price. I know that free-market enthusiasts will always respond to this assertion that it was priced right, since the deal was oversubscribed at the $38 price, which was a significant increase over the previous range, especially considering that the deal size was also increased. But the aftermarket performance indicates that the lead underwriter may have overestimated the strength and stickiness of its book or the commitment of its institutional accounts, or they got a little too greedy, or all of the above. I simply do not believe that Facebook is deserving of a $111 billion valuation, which is what it was priced at. This puts it ahead of companies like HP, Cisco, Disney, Dow Chemical, Texas Instruments, GM, United Technologies and McDonald's, and it is close to companies like Intel and Oracle. I am not convinced that Facebook has the growth potential to justify its valuation, and that is clearly one of the factors spooking investors.

3. Lack of profit leverage. Facebook has outstanding profitability, with gross margin at around 75 - 80% and operating margin around 50%, but peak operating profit occurred in late 2010, and earnings have essentially tracked revenue since. It is hard to see the company doing better than EPS tracking revenue growth, and it is conceivable that EPS could lag revenue growth if some of the problems outlined in #2 become bigger issues. Earnings growth is mother's milk to growth investors, and Facebook may be facing an uphill struggle.

5. Underwriter and Nasdaq fumbles. Morgan Stanley, the lead underwriter, either got too greedy or overestimated the strength of its book when it increased the size of the deal and the price to the top of the increased price range. This caused many institutions to immediately flip their allocations, and in some cases take short positions. The underwriters could not support the stock in the face of such massive volumes, and have had to step out of the way, causing further weakness in the stock. Nasdaq also stumbled in the way it managed the opening of trading and its inability to execute and confirm trades for hours after they were placed, which caused huge investor irritation and cost people a lot of money. While it wasn't the company's fault, it was just another aberration that affected investor confidence.
There has been a lot of chatter suggesting the massive valuations assigned to Facebook and other Web 2.0 companies is creating another valuation bubble reminiscent of the dot com bubble of the late 1990's. I believe that the valuation of many Web 2.0 companies is excessive and presents significant downside risk to investors, which meets the working definition of a bubble. However, it is nothing like the stock market bubble of the late 1990's, which peaked in 2000 and collapsed in dramatic fashion. The dot com bubble was much more widespread - not just dot com companies, but hardware companies, telecom and network companies, semiconductor companies, software companies, optical fiber companies, etc. all traded at absolutely ridiculous valuations that were rationalized by the mantra "the Internet is going to change the world and the stock market is forever changed." They were right on the first part and really, really wrong on the second part. The Nasdaq composite peaked at over 5000 in March 2000, and is around 2850 today. The valuation mania that has caused a valuation bubble among Web 2.0 companies is really confined to the Web 2.0 companies and hasn't spilled over to other business in the ecosystem.
Investor behavior is also very different this time around, as evidenced by Facebook's trading performance. There has been a wide variation in the post-IPO trading performance for different stocks. Companies like Linked In, Splunk, and Jive Software have performed very well since their IPO, while others such as Zynga, Groupon, Pandora, and Friend Finder have declined significantly. Investors are being selective - companies with credible performance, operating models and management are seeing their stocks perform well, and companies with flawed models and inconsistent results are being punished. This is very different than 1999, when every stock went up, sometimes by several times on the first day, and the market did not show any selectivity.
There will be some very successful companies that emerge from the current crop of IPO's and also some disasters. I fully believe that Facebook will be a very successful company and will figure out how to strengthen its position as the dominant social networking company, and hopefully will figure out how to create a stable, growing revenue stream from its massive user base. I just don't believe it deserves to be a $100 billion market cap company today. I hope the insiders take a lesson from Mark Cuban and put a collar on their stock to preserve today's value.