Facebook’s disastrous debut as a public company (its stock dropped below $28 per share, down about 27%, from its May 18 IPO price of $38) has lawsuits claiming that the company made “false and misleading representations and omissions” during its IPO road show.
It also has investors wondering whether the social networking site, which was valued at $104.1 billion when it went public, but its market cap has dropped to about $76 billion, will end up being the worst flop in tech history (especially when compared to the debuts of giants such as Google and Apple, and even to relatively disappointing tech debuts such as Groupon and LinkedIn).
Here are 7 reasons why FB is struggling among investors:
1. Facebook is “Dying”: Facebook isn't being “liked” anymore by teenagers and young adults, as the novelty fades and they migrate to other online “hangouts” such as Google+, Tumblr, and Instagram. According to the Los Angeles Times, millennials are seeking to hook up with smaller and more intimate circles away from their parents and other adults who could make a big deal out of every innocuous post on the social network potentially hurting their chances to land a job of getting into college.
2. Facebook is Bursting Tech Bubble 2.0: The Facebook stock debacle is reinforcing investors’ fears that a tech bubble, similar to the one that wiped most of the booming internet sector back in 2000-01, is already here. Wary investors, who witnessed the disappointing debuts of tech companies Groupon and LinkedIn, are beginning to wonder if Facebook’s poorly performing IPO is the definite sign that tech bubble 2.0 is here (especially after companies such as kayak.com have been forced to delay their own IPOs due to Facebook’s debacle).
3. Facebook’s Marketing and Sales Expenses are Skyrocketing: Facebook’s marketing and sales costs are increasing at an alarming rate, signaling that revenue growth is slowing as the cost of adding new users and maintaining the existing ones keeps rising. This is due to the increasing number of ads the social network displays as they are disruptive and drive users away from the service prompting the company to spend more and more to keep them from leaving.
4. Facebook’s Inability to Monetize the Mobile Market: The disruptive nature of advertisement in the social network is the same reason why Facebook has failed to conquer the growing mobile market, as smaller screens mean the potential ads are even more disruptive. However, the social network’s apparent attempt to break itself down into standalone applications (Facebook Camera, Facebook Pages, Facebook Messages) to be distributed through the Apple App Store could be a sign to investors that the company is trying to join the booming market of mobile advertising networks.
5. Facebook’s Inability to Expand its Revenue Model Horizontally: Facebook’s failure to expand its revenue model to areas other than advertisement and payment fees has always been closely examined by skeptical investors. However, the recent withdrawal of General Motors from Facebook Ads, and JCPenney and Nordstrom from its "F-commerce" platform has aggravated these concerns. The picture complicates further as investors believe Facebook relies too much on social gaming developer Zynga, in which user engagement has also taken a hit.
6. Facebook’s Instagram Debacle: Investors believe Facebook’s acquisition of photo-sharing application Instagram for $1 billion adds minimal value, as Facebook is largely perceived as having made the move in order to protect its competitive edge. Additionally, both the FTC investigation on the planned acquisition of Instagram as well as its hefty break-up fee of $200 million have raised flags among investors.
7. Facebook’s Management May Not Be “Shareholder Friendly”: Facebook operates as a “controlled” company, meaning that it is not required to have a majority of the Board of Directors to be independent. Investors believe this could cause friction between management and shareholders going forward, as the secrecy around Facebook’s purchase of Instagram (CEO Mark Zuckerberg went rogue by not consulting other board members on the important acquisition) suggests a similar pattern can be expected in the future.