The $38 Share Price That Nobody Wanted by Afternoon

Facebook filed its S-1 with the Securities and Exchange Commission in February 2012, disclosing a company with $3.71 billion in 2011 revenue and 845 million monthly active users. The filing set the stage for what was then the largest technology IPO in American history by market capitalisation at listing. Underwriters, led by Morgan Stanley with JPMorgan Chase and Goldman Sachs in supporting roles, initially marketed shares in a range of $28 to $35. In the days before the 18 May offering date, that range was revised upward to $34 to $38, and the final price was set at the ceiling: $38 a share, implying a market capitalisation of roughly $104 billion — approximately 107 times 2011 earnings.

The valuation logic rested heavily on mobile. What the S-1 also disclosed, in language that received less attention during the roadshow than it would afterward, was that Facebook had not yet developed a meaningful way to monetise mobile traffic, even as mobile usage was growing faster than desktop. That caveat proved consequential almost immediately.

Trading on the Nasdaq was scheduled to open at 11 a.m. on 18 May. It did not begin until 11:30, delayed by a technical malfunction in Nasdaq's IPO cross system that left order confirmations unprocessed for roughly 30 minutes. The glitch affected millions of shares and generated subsequent regulatory action against the exchange: Nasdaq OMX later agreed to pay $10 million to settle SEC charges related to the systems failure — at the time the largest penalty ever imposed on an exchange.

When trading finally opened, Facebook shares briefly touched $45 before retreating. They closed at $38.23 — a figure that masked how close the stock came to ending its first day below the offer price. Morgan Stanley, acting as stabilising agent, purchased shares in the open market throughout the session to prevent the price from breaking the $38 floor, a standard but rarely so visibly necessary underwriting function. Within two days the stock fell to $34. Within a month it was trading below $27. Mark Zuckerberg's equity stake, worth approximately $19 billion at the offer price on paper, tracked the decline alongside it.

What followed the IPO was unusual in its specificity. Reports emerged, and were later confirmed in regulatory proceedings, that Morgan Stanley's research analysts had revised their revenue forecasts for Facebook downward during the roadshow — after the company disclosed internally that mobile growth was pressuring near-term ad revenue — and that those revised estimates had been communicated selectively to institutional clients rather than published broadly. Massachusetts Secretary of State William Galvin opened an investigation; FINRA examined the matter. Morgan Stanley ultimately reached a settlement with Massachusetts regulators, paying a $5 million fine without admitting wrongdoing.

The episode sharpened an already contentious debate about the two-tier information environment that roadshows create: institutional investors receive face-to-face presentations and analyst guidance unavailable to retail participants who buy on the same day at the same price. The Facebook listing did not change that structure, but it made the asymmetry unusually legible.

Facebook shares did not close above $38 again until August 2013 — about fifteen months after the IPO. The recovery was driven principally by the company's demonstration that it could, after all, sell advertising against mobile traffic: mobile ad revenue, negligible at the time of listing, accounted for 41 percent of total advertising revenue in the second quarter of 2013, according to the company's earnings release. By the end of 2013 the stock was trading above $50. The IPO, in retrospect, priced a business that existed in 2012 at a valuation that required 2013's product to justify it — and the market spent the intervening year deciding whether to believe the gap would close.