Facebook is now trading at 24% below the IPO price. This is a significant price adjustment for a new stock (or any stock) and suggests that the bankers overpriced the stock at the IPO. Aswath Damodaran, the legendary NYU finance professor, explains where the bankers went wrong in this excerpt from Business Insider:
"I think the investment bankers priced the offering based on how shares of Facebook were trading in the private market and their assessments of institutional demand. I don't think that revenue growth, margins, risk or any other fundamentals played much of a role in the pricing. I don't fault them for playing the momentum game, but they played it badly."
Most stocks do not have a large active private market prior to their IPO. Facebook established their private market partly as a means to provide liquidity to the founders and perhaps to provide some support for an aggressive valuation at the IPO.
As crowd funding grows as a means to fund startups and other private markets in pre-IPO stock emerge, perhaps one should be cautious about these markets as a basis to price IPOs.