(Reuters) - The historic initial public offering of Facebook Inc did not go as planned on Friday, as the social networking company's sky-high valuation combined with trading glitches left the stock languishing near its offering price at the market close.

Facebook shares began trading late Friday morning and opened 11 percent above the $38 offering price, but after peaking at about $45 slid rapidly at the end of the day to close at $38.23. The IPO was the third-largest in U.S. history and valued eight-year-old Facebook at $104 billion.

The surprisingly weak debut of a stock that analysts had predicted would climb between 10 and 50 percent is not likely to dent the business prospects of Facebook, which boasts 900 million users and is upending business practices and social relationships around the world.

But the unexpected developments were a clear setback for Morgan Stanley, the lead underwriter on the deal, which sources said was forced to defend the $38 price level by buying shares on the open market. Many market participants said they expected the stock to remain under pressure next week.

The offering also proved an embarrassment for the NASDAQ: the opening was delayed as the exchange struggled with a huge volume of orders, and for much of the day there were long delays in order confirmation. The SEC said late Friday that it was reviewing the situation.

Social media companies and Internet companies that had hoped to benefit from a Facebook halo effect were instead dragged down Friday, with social gaming giant Zynga dropping almost 15 percent.

Analysts said Facebook may simply have over-reached in raising the IPO price range, pricing at the top of the range and increasing the size of the offering earlier in the week.

"The underwriters got greedy on behalf of selling shareholders and bumped the price high enough that they didn't get much of a bump on the first day," said Bill Smead, chief investment officer at Smead Capital Management, which did not buy Facebook shares in the IPO. "They increased the size of the deal and that really did a number on it."

Skeptics have argued all along that a valuation of more than $100 billion -- about equivalent to Amazon.com Inc and exceeding that of Hewlett-Packard Co and Dell Inc combined -- was far too high for a company that posted $1 billion in profit and $3.7 billion in revenue in 2011.

Concerns about Facebook's earnings potential were highlighted by General Motors' announcement this week that it would no longer buy paid advertising on Facebook.

"You don't need more than a small pencil and napkin to do a valuation on this, to say there are heroic assumptions in earnings growth to keep this at $100 billion, much less $115 billion or $120 billion," said Dave Rolfe, fund manager at River Park Wedgewood Fund, which does not own shares in Facebook.

"I know there's a lot of excitement and exuberance, but it seemed today that the market is starting to do some hard valuation math early on."

Facebook's opening day on Wall Street does not bode well for the stock's performance in the days ahead, said Channing Smith, portfolio manager at Capital Advisors Growth, which does not own shares in Facebook.

"If you're an investment banker or if you're long the stock, I would definitely be a bit worried as we walk away to the weekend," he said.

The weak IPO may also give pause to private investors in Silicon Valley who have been pouring money into next-generation Internet companies at very high valuations in the hope of eventually taking them public.

MEDIA CIRCUS

At Facebook's headquarters in Silicon Valley, the day began with company founder and Chief Executive Mark Zuckerberg, 28, symbolically ringing the opening bell for stock trading on Friday morning.

Wearing his trademark black hoodie, Zuckerberg, whose shares are worth nearly $20 billion and who retains voting control over the company, hugged and high-fived Sheryl Sandberg, Facebook's chief operating officer, who is credited with bringing crucial business discipline to a company founded in a Harvard dorm room.

The area outside Facebook's offices was packed with photographers, more than a dozen television trucks, and a TV news helicopter hovering overhead.

Outside Nasdaq headquarters in New York, crowds also gathered, even as exchange officials struggled to sort out trading problems that left investors guessing whether their buy and sell orders had actually been executed.

The IPO minted thousands of new paper millionaires among Facebook's 3,500 employees -- and a handful of billionaires among its founders and early investors. More than half of the proceeds of the IPO will go to existing shareholders, including early backers such as Accel Partners and Russia's DST Global.

In the run-up to the IPO, demand from institutional investors was strong, and many analysts had expected an influx of retail investors keen on owning a slice of a cultural phenomenon regardless of price. But that did not materialize.

"Flippers who waited all day for a pop that did not come decided to throw in the towel and get out," said Mohannad Aama, managing director at Beam Capital Management LLC in New York.

"That group also includes people who over-extended themselves in getting more shares than they can afford to hold -- whether they got it from the syndicate or from the open market once it opened around noon."

Still, from Facebook's perspective, the stock performance could be seen as reflecting smart pricing: Zuckerberg and early investors pocketed maximum gains and left little of the easy money on the table.

"You want to price the offering correctly. Institutional buyers get a little bump and the company raises the right amount of money," said Kevin Hartz, co-founder and CEO of Eventbrite, an online ticketing startup that is integrated with Facebook's platform. "If the stock has a massive bump on day one, that means you misread market demand and the company could have raised more money with the same amount of dilution, or could have raised the same amount of money with less dilution."

BATTLE OF THE GIANTS

Facebook faces many challenges as it takes its place beside Google, Apple and Amazon as one of the giant public companies defining the next-generation Internet economy. Google in particular views Facebook as a mortal threat and is moving aggressively to integrate social networking features across its products.

At the same time, scores of young companies are building new products and services, in some cases on top of the Facebook platform and in some cases in competition with it, and attracting huge amounts of investment capital.

A handful of such so-called Web 2.0 companies, including Zynga Inc, LinkedIn Corp, Yelp Inc and Groupon Inc, have already gone public, and others have been acquired by the industry giants. All of those stocks fell on Friday in sympathy with Facebook's weaker-than-expected debut.

In an indication of the land grab now under way in the Internet world, Facebook in April spent $1 billion to acquire Instagram, a tiny photo-sharing company with lots of users but no revenue. A Facebook rival, social scrap-booking site Pinterest, raised money earlier this week at a valuation of $1.5 billion in a sign that venture capitalists and other private investors still see enormous potential in Web 2.0 companies.

Many of Facebook's users spend hours a day on the site and share enormous amounts of personal information. That in turn enables Facebook to target its advertising to people's specific interests, and many analysts believe the huge store of personal information gives Facebook an advantage that Google and other cannot match.

"Literally everything you see on the Internet, you could see inside Facebook -- but done with much more of the social graph built into it," said Siva Kumar, CEO of e-commerce company TheFind. "In a way, they operate the mall, and everybody in the mall will pay some way or the other to Facebook."

Analysts say the company has vast untapped opportunities in mobile computing, where it has been weak thus far, and potentially in other Internet services such as email and search. Zuckerberg, though unproven as a public company CEO, is widely admired as a product visionary who has done a masterful job in continually improving the Facebook experience.

Skeptics, though, note that only a small percentage of Facebook users respond to advertising on the site. Google retains a big advantage in that regard, because advertising related to specific Internet searches is by nature far more relevant and thus more valuable.

In Silicon Valley, though, the conventional wisdom is that Facebook and its social media brethren will be an increasingly important force in the business world for many years to come.

And no matter how the industry dynamics unfold over the long term, the influx of wealth arising from Facebook's extraordinary growth has already helped drive a mini-boom in San Francisco Bay Area real estate. Income tax revenues related to the IPO will cut the state of California's budget deficit by an estimated $2 billion.