Facebook’s stock hit a new low last week -- and it could be poised to plunge even further. The spiral that started last Thursday ended the next day at $19.05 a share, just shy of half of Facebook’s initial public offering price in May. While Facebook’s underlying business remains strong, there are a number of factors that argue for a lower price.
Inside the Latest Slide
The latest slump in Facebook stock began on the day early investors could start selling a total of 271 million shares. While it was unlikely the investors, which includd Accel Partners and Goldman Sachs, would dump all their shares immediately, the mere fact it was possible seemed to panic other investors. Trading volume soared Friday to 157 million shares (versus a 30-day average of 31 million shares).
Why Facebook Stock Is Heading South
The big question now is whether Facebook stock could go still lower? The simple answer is “yes”. Henry Blodget, former Wall Street analyst and editor-in-chief of Business Insider, noted that at $20 a share, Facebook is still trading at 31 times projected earnings per share for next year. By comparison, Apple and Google trade at less than 15 times projected earnings. “Facebook could easily trade at 20X-30X next year’s earnings and still have a nice valuation. So the stock could go considerably lower,” Blodget said.
Other factors often cited as weighing down the stock include slowing growth in both sales and new subscribers as well as the lack of a clearly articulated strategy for reaping ad dollars or other revenue from users accessing the site via mobile devices. The latter is particularly troubling since more than half of Facebook’s 955 million users accessed the site through their phones at the end of June, an increase of 67% over last year. And of course, posting a loss in its first quarerly earning report didn't help either, even though it was a one-time charge for stock compensation, the company posted a profit on an adjusted basis and investors were expecting the results.
How Much Is Facebook Worth?
The stock-price pummeling has had a huge impact on Facebook’s valuation, which was a jaw-dropping $104 billion when the company made its stock market debut. Since then, Facebook’s worth has plummeted to between $42.5 billion and $54 billion, depending on how financial reporting services calculate the total number of Facebook shares outstanding, according to the MercuryNews.com.
Boosting Investor Trust
To regain investor trust, Facebook will have to show progress in its ad business in its next earnings report, due in October. If the company fails to do that, its stock is sure to get whacked again. Shares could take another beating in November when early investors and employees will be eligible to sell an additional 1.2 billion shares.
How the Stock Price Hurts Facebook
A low stock price is more than just an investor problem - it also affects the company’s core business operations in a number of ways.
Without rising share prices, Facebook may find it more expensive to attract and retain the best talent. Top programmers in Silicon Valley typically look for stock options or grants with the potential to supplement their salaries. Without that promise, Facebook may have to offer above-market salaries and bigger stock grants.
Facebook’s troubles with Wall Street could also cause advertisers to lose confidence in the company and rethink using the social network as a key platform. While that’s primarily a perception problem, it’s one that Facebook cannot afford to take hold.
Good Company, Bad Stock
It’s important to remember that stock price aside, Facebook is not a lousy business. While revenue isn’t rising as fast as analysts would like, it is growing. Investors initially bought into the company expecting the next Google. What they got was a company still working out the kinks of its business model. Trip Chowdry of Global Equities Research summed up Facebook’s dilemma when he called it “a good company, but a terrible stock.”
Wall Street remains bullish on Facebook in the long term. Thomson Reuters lists 17 analysts with either a strong buy or buy rating, with only two listing the stock as underperform or sell.
The long-term optimism hinges on the belief that Facebook is a young company and will eventually figure out how to make buckets of ad dollars from the profiles, friends and activities of its almost 1 billion users. So the bulls are willing to give the company time, as long as it shows progress. Blodget pointed out that Amazon.com’s stock showed little progress for years after the dot-com crash - before climbing steadily starting in late 20008.
What’s Next for Facebook?
Before its IPO, Facebook’s success was measured in how fast it could build a large user base. Now, investors are looking for revenue, profits and forecasts that point to high returns.
Some industry watchers have already begun questionong whether co-founder and chief executive Mark Zuckerberg is up to the task.
That’s pretty much a moot point. Zuckerberg retains a controlling interest in Facebook, so he can’t really be forced out, and he’s unlikely to step down any time soon. And to be fair, Zuckerberg always made clear his intentions to build a great company and not focus on quarterly earnings - it’s not his fault if investors refused to listen.
You can blame the company for being overly aggressive (and of focusing on the short term) by pushing the IPO price as high as it possibly could. It’s impossible to say how things might have been different if Facebook had debuted with a market cap of “only” $70 billion and a glitch-free IPO. But it’s a safe bet that Zuckerberg didn’t make many friends with his go-for-broke approach to taking Facebook public.