How Low Can Facebook Go?

Facebook shares have fallen 36% since the IPO, which generated $9 billion for company insiders. “It has become a show-me story,” one analyst said.

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Paul Sakuma / AP

Facebook CEO Mark Zuckerberg in Sun Valley, Idaho on July 12, 2012.

Facebook shares plummeted to a new all-time low Thursday after the company reported a $157 million loss in its first full quarter as a publicly-traded company. Although Facebook’s results were roughly in line with analyst expectations, the report failed to ease investor skepticism about the company’s business model and its future prospects. Despite having built a user-base of nearly 1 billion users — and a talented top executive team — Facebook is still having trouble convincing the market that it can eventually justify the staggering $100 billion valuation that was implied by its blockbuster — and botched — IPO.

“Our goal is to help every person stay connected and every product they use be a great social experience,” Mark Zuckerberg, Facebook’s founder, CEO, and majority voter, said in a brief and anodyne earnings release. “That’s why we’re so focused on investing in our priorities of mobile, platform and social ads to help people have these experiences with their friends.”

(More: Zynga Plunges 40% in Tech Bloodbath)

To Zuck’s credit, after much speculation about whether he would be on the call, he was there, and he spoke with clarity, poise, and what struck me as a growing sense of maturity. Maybe it’s because he just got married; maybe it’s because he’s worth $14 billion; maybe it’s because he just secured a $6 million home loan for 1%. In any event, Zuck seemed more confident on the call than I’d heard him before, and I was impressed by his performance. In a note to clients, Scott Devitt, tech analyst for Morgan Stanley, Facebook’s lead underwriter, called the report “an encouraging start.”

I’ve written several posts about Facebook here, and I listened closely to the earnings call Thursday evening, which Zuck led, backed up by COO Sheryl Sandberg and CFO David Ebersman. I didn’t hear anything to shake my fundamental thesis about the world’s largest social network. Unlike Google and Amazon, which people use for search and shopping, people use Facebook to hang out with their friends. When your goal is to share links and photos, ads can seem like a distraction. Google, by contrast, is a site that people use — by definition — because they’re searching for something, so there’s a natural opportunity to present ads related to what people are looking for.

Social sites like Facebook have a harder time coming up with the right formula for advertising, not least of all because they don’t want to be annoying, like MySpace, which became overwhelmed with overbearing banner and pop-up ads. Over the last few weeks Facebook has pressed the case that its ads are a good value proposition for marketers, and COO Sandberg — a former top advertising honcho at Google — effortlessly rattled off a list of examples of how Facebook has made advertisers money. Facebook is apparently wooing General Motors back, after the auto giant pulled its ads earlier this year, because they didn’t seem worth it. Facebook conducted an internal study of its ad effectiveness, and consulted with respected outside agencies like comScore to study the issue. I’ve looked at the materials, and I remain unconvinced about Facebook’s ad strategy.

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Then there’s the IPO. Facebook priced its offering at $38 per share. The stock is now trading below $24. That’s a 36% decline since the highly vaunted offering, just a few months ago, woefully under-performing the NASDAQ, where Facebook went public, the Dow Jones Industrial Average, and the S&P 500. The IPO was a big success for Facebook and its early investors and insiders, who sold $9 billion worth of shares that they had acquired at lower prices.

Angry shareholders have charged that analysts at Facebook’s underwriters lowered their financial forecasts for big, favored clients, but didn’t inform the investing public at large. Another lawsuit charges that the company’s IPO documents “were negligently prepared and failed to disclose material information about Facebook’s business, operations and prospects.” Specifically, the lawsuits charge that Facebook hid the financial impact of challenges to its mobile advertising business — challenges that would have been material information for prospective Facebook investors.

On Thursday’s conference call, not a single Wall Street bank analyst asked the Facebook executives about the company’s IPO. Facebook had 33 underwriters for its IPO, including every one of the top Wall Street banks.

Facebook’s post-earnings plunge reflects how spooked investors are about the global economy. On Tuesday, web game-maker Zynga’s delivered a dismal report. Tech investors had been bracing for bad news after Intel last week reduced its forecast for the rest of the year. On Wednesday, streaming video pioneer Netflix plunged 25% after analysts cut their estimates for the company, following its own disappointing earnings report. Facebook is just the latest tech company to face a market that is allowing almost no margin for error. As Nabil Elsheshai, a senior equity research analyst at Thrivent Financial, told Bloomberg: “It has become a show-me story.”

30 comments
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OceansideChiropractor
OceansideChiropractor

Facebook helped us all connect to our loved ones. But sometimes it also causes panic to it's readers. If they could filter the true facts from fiction that would be a great help to all of us. I wonder what would happen to Facebook?

Raintintin
Raintintin

Wow. A lot of negative vibes from people who obviously don't mind spending time, and being active online. I find it ironic that facebook is probably the main platform from which to recruit brandvocates, and also to assist them to brandvocate. Yet, not a word muttered in defense (maybe in the face of such wrath it wouldn't seem advisable). I doubt very much facebook will disappear - there's too many people's memories tied up in there. And there's too much business at stake. Where will the brandvocates come from?

GiggleFart
GiggleFart

Facebook has turned the social experience into one of frustration as it tries to propagate the marketing engine; by polluting your news feed with the crap of likes. Their formula seems to be to allow websites et al to drive up traffic stats based on the majority of gullible, simple-minded users who will 'like' anything and everything they see.

Drive away the users and facebook will crumble.

BalanceZero
BalanceZero

Facebook can go as low as the respect the people who run it have for the people who use it.

BoundGodsFan
BoundGodsFan

I refuse to use it anymore. I'm getting to the point of boycotting any company or website that displays the FB logo, "Like" or "Recommend" button anywhere. It's a moral issue for me. After learning what Mark Zuckerberg said about and admitted to in 2004, I lost all respect for him and any company under the FB umbrella. For proof, google it...in 2004, he admitted that he called his users "dumb f***s" for trusting him with their information. That type of mindset does not change much over time. And for more companies to jump on the bandwagon of having their users having to sign in through FB is condoning such a disrespectful company and essentially echoing M.Z. "Dumb f***s" sentiment.

To Time Magazine: This is a formal request. Please remove any buttons or logos that helps support Facebook. Thank you!

Nancy Elwell
Nancy Elwell

Facebook is fading away. Nobody I knows likes it anymore but are using it til a better thing comes around...which is bound to happen sooner rather than later. Not soon enough for me!

John Nunes
John Nunes

Everyone should just install the adblock extension for their browser. :)

DGolfer53
DGolfer53

Disclosure:  Been working in Tech for 20 + years.  What gets me is that no one seems to understand the difference between 'users' and 'accounts' .  It may be true that FB has a billion ACCOUNTS, but for every 100 people I know who have an account on FB, only 10 visit the site once a month.  Maybe 1 in 100 visit daily.. so, that Billion comes quickly down to 10 million.  On top of that, I know more people deleting their accounts now than joining...    In our company, our Marketing Dept does use FB, as many do these days, but we put emphasis on NOT clicking on any advertisements.  I have seen enough virus spread via FB than I want to relate in this column.  To all that bought, or still hang their hopes on this stock, good luck!

Grindit12
Grindit12

Keep making money on FB put options... how low can it go?  It's like G. Ribisi and Vin Diesel doing pump and dump!

i hate this
i hate this

shame on the biggest scam of the century - facebook. 

Joe_Loudon
Joe_Loudon

"Zuck?" What the f*ck?

Is the author of this article a pal of Zukcerberg's? Seriously why would any editor let this sentence -- "In any event, Zuck seemed more confident on the call than I’d heard him before, and I was impressed by his performance" -- and the repeated use of "Zuck" go?

The informality is unprofessional and defnitely gives me doubt about the objectivity of the writer.

Also, it must be nice to get a home loan for 1%  interest. Then again, why does a guy worth $14 billion get a loan for $6 million? Unless my calculations are off $6 million is around 0.0004% of $14 billion. Who takes out a loan for an amount that represents less than 1% of their total worth?

jesuguru
jesuguru

"Who takes out a loan for an amount that represents less than 1% of their total worth?"

Fair question. Answer: someone who knows that rather than buy the property outright, they can be investing that 6 million with a greater (average) return than 1%. Many average homeowners probably would like to know how they too could get in on the 1% mortgage rate thing.

Nancy Elwell
Nancy Elwell

remember how so many folks bitched about not getting a fair shot at the IPO..bet they're singing a different tune not. (love the font at this site)

S_Deemer
S_Deemer

I was on Facebook for 2 years, mainly to keep in touch with my daughter, since FB seems to be her preferred means of communication. Zuckerberg's obsession on privacy has always given me the creeps, and finally, I pulled the plug last month. I'm basically asocial, and Facebook was an intrusion into my life that I did not welcome.

I won't say Facebook is a fad, although it sure looks like one to me, and I will admit to some schadenfreude over what has happened to its stock valuation in the past few weeks.

Vaengineer
Vaengineer

Let's face it.  All internet based IPO's are done for the purpose of allowing the original creators the opportunity to cash in while the getting is good. 

Indietoo
Indietoo

I never click on Facebook ads- instead, if any pitch interests me, I open up a browser window and do a fresh search. It's silly, I know,  but I couldn't really figure out how FB was valued at where it was and damned if I was going to be part of the justification of the overhyped overrated IPO of the century. 

bcfred
bcfred

Nobody could legitimately justify the IPO valuation.  25x revenue and 100x earnings is so patently absurd on its face that the only justification was the hope a portion of shares could be flipped quickly to cover most of the cost of the investment with the remaining shares held as wish money.  Oops.  Obviously investors have decided the best approach now is to sell and cut losses or just hold on and pray something unexpected happens.  No buying support whatsoever.

Lp Johnson
Lp Johnson

Dear Mark, We H-A-T-E the Ads that change every 3 seconds and make the whole Browser hang. Sincerely, the USERS who you and your investors SHOULD be worried about. 

Ohwoahisme
Ohwoahisme

The IPO was simply priced too high to begin with, the long bet largely based upon the advertising potential to a billion users. It will be around for quite awhile merely for the volume of traffic the site handles, but Zuckerberg  needs to focus creatively on the user side and bring in business people to handle business infrastructure over the long-term.  For quick  profiteers, it looked like a stock to 'short' from the beginning.

James Moon
James Moon

Friction-less sharing is annoying and intrusive.  It chases people away from social networks.  If FB wants it's "users" to actually "USE" FB, they need to return to the days when people had more privacy and shared data that they actually want to share.  Friction-less sharing is not appealing at all.

ChowT
ChowT

Well executed con job.

Magik13
Magik13

Facebook sucks and has had a negative impact on humanity. People no longer have to communicate face to face or speak to each other. On FB, all you get is an image...a persona....a false self. People can present themselves anyway they want. Face to face interactions and socializing involve body language and interaction. Most people I know are getting away from Facebook...which has eroded privacy. 

Nancy Elwell
Nancy Elwell

i've known my friends for a very long while so this doesn't apply to me. anyone who randomly friends a stranger deserves what they get.

Raymondqa
Raymondqa

Dawn responded I didnt know that some one able to profit $9442 in a few weeks on the internet. did you look this(Click on menu Home)

DeborahSmythe
DeborahSmythe

Like many manias, the rise of Facebook was largely driven by over-coverage from the world's media.  As shown here, this was no different that one of the world's first and most ridiculous manias:

http://viableopposition.blogsp...

How low can FB go?  All we need to do is look at history to see that we may be nowhere near a bottom