Facebook has hit a new low, literally and reputationally. The stock fell to $23.70 per share on Friday, down nearly 40% from the IPO price of $38.00 and the lowest closing for the stock. The initial valuation of the company was over $100 billion, and now it is about $65 billion. The disappearance of over $35 billion of value is not something the marketplace takes lightly. The investment community is irate and demanding more details.
In the company’s first quarterly earnings announcement on Thursday, investors received anything but confidence in the future of FB. The information provided by the company was sparse and only tangentially discussed the major issues affecting FB. These include the very rapid growth of mobile access to FB and the implications this phenomenon will have on future earnings, the direction of advertising for the company (what types of advertisers will use FB and how will advertisements be installed on mobiles) and the impact of billions of restricted stock units on the price of the stock (nearly 1 billion shares owned by insiders and employees may be sold soon).
The earnings report was an underwhelming event. At earnings of $.12 per share, the company’s current stock price cannot be sustained, and it should be under further pressure in the days to come. The only way to stem this tide is for management to present a more comprehensive and believable strategy to address the aforementioned issues. The other way is to post a much higher earnings growth rate, but this will take some time. Surprisingly, FB has resisted the calls for forecasts and is amazingly cavalier about a rapidly declining situation that has cost FB investors some very big numbers.
Some ancillary facts that exacerbate the FB conundrum include the following:
• About 420 million FB shares, or 15 percent, currently trade. By November, RSUs will increase this number by 1 billion. The greater number of shares will, no doubt, put tremendous pressure on the stock price unless management can turn the ship around.
• Zynga, a huge client of FB, is having very serious problems.
• Apple is reportedly discussing the acquisition of Twitter, a move that could have serious consequences to FB’s hold on social media.
• The mobile business is changing much faster than originally forecasted. Zuckerberg stated the other day that there will be 4-5 billion of them in five years. This means that every company in the Internet business better have a plan to deal with many more smartphones.
• “The gleam has come off the word ‘social,’” said a well-known Internet analyst. “The ground is now shifting underneath these companies’ feet at a speed that we didn’t see even in the late 1990s.”
• The research group IDC said, “The jury is in; Facebook is not and will not be a second Google.”
The IPO proceeded with a lot of questions unanswered. These questions still remain and are the topic a lot of analysts. The problems affiliated with other Internet IPOs are not helping the overall situation; they include Zynga, Netflix and Groupon. Coupled with a highly disappointing FB deal, the expectations for other emerging Internet companies are tenuous at best. They will, for sure, have their valuations slashed when they go public.
FB needs to be more proactive with their investors. The latter have taken a huge hit and expect answers. The decision of management to sidestep questions is puzzling and may have something to do with their inexperience.