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.”

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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.”