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Facebook's Stock May Keep Falling: 'There's No Bottom'

Monday, 21 May 2012 | 1:32 PM ET

Call it the Friday Facebook Fiasco — or a more colorful alliterative of your choice. Regardless, the chaotic opening of the much-hyped social network's stock scared away investors on Monday—and may keep them away.

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Talk also lingered over whether Facebook could monetize its 900-million-strong user base, as well as whether CEO Mark Zuckerberg really cared enough to make sure his shareholders are happy.

Overall, the twin worries of Facebook's pricing combined with the shaky mechanics of its trading to create a pungent air of uncertainty around the company.

As a result, Facebook openedMonday below its $38 Friday open and moved sharply lower through the day.

"They should have delayed it," says Dave Rovelli, managing director of US equity trading at Canaccord Genuity in New York. " They shouldn't have opened until 1 o'clock (Friday), until they fixed the glitch."

The Nasdaqexchange, which houses many of the market's biggest tech names, had trouble matching orders Friday morning and missed the expected 11 am Facebook kickoff.

Nevertheless, the stock made a quick move higher at the open, but then meandered through most of the session before finishing modestly higher at $38.23 on a powerful move from underwriter Morgan Stanley to defend the opening price.

Now, the stock faces nothing but questions as a market love affair quickly turned to estrangement. Underwriters were left powerless to support the price because the stock opened well below the $38 breakeven level, and rumors swirled that lawsuits would be forthcoming from those who didn't get orders filled properly.

"All the buy-side institutions are shorting it. You can get a borrow on it and everyone's leaning all over it. There's no bottom," Rovelli says. "The next catalyst is going to be earnings, which is three months away. So there's no reason to jump in here. You're catching a falling knife."

"What we're seeing here is the market is converging back to reality." -Principal, Hudson Square Research, Daniel Ernst

In a previous CNBC.com interview, Rovellihad advised investors to stay away from the stock until the company had more visibility on how it would grow revenue.

Without more proof of growth capability, investors decided that perhaps the initial Facebook pricing range, with a low end of $28 a share, was more accurate than the final range.

"What we're seeing here is the market is converging back to reality," Daniel Ernst, principal at Hudson Square Research, said on CNBC's "Squawk on the Street" program. "We liked it at the bottom of the first range. The lower 30s, high 20s, we'd be more interested...Right now we're kind of sitting on the sidelines and watching it."

For Ernst, the story of Facebook is that as market sentiment cools, trader mentality will focus back on the fundamentals of value and earnings power.

"No doubt this is a fantastic company — 53 percent operating margins, 901 millions users around the world — they can provide detailed targeting to advertisers," he said. "I think this is going to reinvent digital advertising. I just don't want to pay 70 times earnings for it. I'd rather pay 50, 40 times earnings for that. So when we see earnings grow, either they'll grow into the multiple or the stock will pull back."

Companies more reasonably priced compared to earnings and revenue, such as Amazon , Google and Apple , are much more enticing, he said.

Cashin on Facebook's Trading Glitch
Art Cashin, UBS head of floor trading, weighs in on the impact of Friday's trading problems on the Nasdaq with Facebook's IPO.

For others, though, that specter of how trading went Friday coupled with other uncertainties to make the stock something to avoid for now.

"Unless you really want it in your portfolio I would wait for stability," says Phil Silverman, managing partner at Kingsview Capital in New York. "It was a total fiasco on Friday. I was really surprised it went down. It just showed you that at this point there's time to buy."

Interestingly, the broader stock marketmanaged to put up a strong gain despite Facebook tanking, though some continued to worry that the fortunes of the two were entwined.

"When you do see some of these bigger IPOs start to really make headlines, it tends to mark the top of a market move," says Brian LaRose, analyst at United-ICAP in Jersey City, N.J. "We feel that could very well be the case here. When you look at many of these equity indexes, we feel we're in a peaking mode."

If nothing else, the problems with Facebook — after all the hype and expectations that the stock would soar and perhaps end the market's May selloff — could be further detriment to the already-battered sentiments of average investors.

"It leaves a bad taste in everyone's mouth," Canaccord's Rovelli says. 'We're trying to get the retail investor back on board, and everyone who bought it is getting creamed."

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