How Facebook overcame its disastrous IPO

May 18, 2015, 6:12 PM UTC
Facebook CEO Mark Zuckerberg Rings Nasdaq Opening Bell
Mark Zuckerberg, chief executive officer of Facebook Inc., center, Sheryl Sandberg, chief operating officer of Facebook, center left, and Robert Greifeld, chief executive officer of Nasdaq OMX Group Inc., center right, applaud after remotely ring the opening bell for trading at the Nasdaq MarketSite from the Facebook campus in Menlo Park, California, U.S., on Friday, May 18, 2012. Facebook Inc. is set to start trading today after a record initial public offering that made the social network more costly than almost every company in the Standard & Poor's 500 Index. Photographer: Zef Nikolla/Facebook via Bloomberg
Photograph by Zef Nikolla — Facebook/Bloomberg/Getty Images

From the technical glitches to the mobile guidance controversy, it would be difficult to characterize Facebook’s IPO, which occurred three years ago today, as anything but disaster. (Just ask Reid Hoffman, a Facebook investor and LinkedIn co-founder, who called it “a pretty egregious fuck-up.”) The ghost of that disaster haunted Facebook for its first year as a publicly traded company, with lackluster stock performance and criticisms over its slowness to the mobile trend.

But today, Facebook (FB) is the toast of Wall Street. Worth $226 billion, Facebook’s stock trades at a rich 81x price-to-earnings multiple. Anyone holding shares at the IPO has seen their value more than double. (The chart below, published previously with the Fortune article, “A Tale of Two IPOs,” contrasts Facebook’s strong stock performance with Twitter’s lukewarm performance.)

CEO Mark Zuckerberg and his merry band of hackers pulled that off by taking a few important lessons to heart. First, Zuckerberg needed to sell his vision to Wall Street—he could no longer send a lower-level proxy in his place to important investor meetings. Second, the company delivered on the thing Wall Street cares most about: profits. Facebook today earns impressive 40% profit margins.

But most importantly, Facebook used its weakness on mobile as a motivator. When the company went public it had no meaningful revenue from mobile. Within 18 months, Facebook delivered a magnificent about-face on mobile, quieting the haters in the process. By the end of 2013, more than half of Facebook’s revenue came from mobile ads. “You want mobile revenue? We’ll show you mobile revenue!” the company seemed to say. Wall Street rewarded the company by trading up its stock.

In doing so, Facebook was able to put its ugly IPO in the past. But there is one company still feeling the pain of May 18, 2012: Nasdaq. The electronic stock exchange recently agreed to pay $26.5 million in a class-action lawsuit with shareholders over its mishandling of the offering.

Beyond payouts, Nasdaq was knocked from its throne as king of the tech IPOs. For 19 years, it was the preferred exchange for almost all tech IPOs, hosting more than NYSE. (Google, Amazon and Apple all trade on Nasdaq). But the exchange took a huge PR hit for its role in the technical glitches of Facebook’s offering. As a result, many high profile companies, including Twitter, King Digital Entertainment, GrubHub, Zendesk, and Fitbit chose to go public on rival exchange NYSE.

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