Facebook Stock Price Still Hard to Defend |
Posted: June 6, 2012 |
Since Facebook debuted as a public company on May 18, the social media behemoth has lost steam and plenty of respect from investors. From its $38 offering price, the stock to date is down nearly 30%. CEO Mark Zuckerberg and pre-IPO investors made out well, but buyers in the past two weeks are most likely not as delighted with their returns. Closing below $26 per share on Tuesday, Facebook shares have shed more than 50% of their value from their $45 peak on their first day trading. After the gore, is Facebook stock finally a bargain, or is its price still inflated, just not as much as it was at $38 per share? Facebook trades at a P/E ratio of 66 times its trailing twelve months of earnings. That’s quite a bit more modest than its triple-digit P/E at IPO, but still far fatter than Google‘s comparatively svelte 17 times trailing earnings, or Apple‘s earnings multiple just shy of 14. Many investors are still uneasy paying that high of a multiple for Facebook, given the company’s troubled business model and uncertain future. “You have to get comfortable with not knowing. This is not General Electric,” says analyst Brian Wieser with Pivotal Research Group. “If you’re expecting predictability, you should sell,” he adds. Facebook’s business model currently relies mostly on advertising, but the effectiveness of Facebook ads is highly questionable. According to Columbia Business School Professor Bruce Greenwald, “If you’re going to buy a camera, you’re not going to click on the Facebook ad, but you are going to Google the name of the camera – and the same goes for price comparisons – finding the best bargains is done on Google, not Facebook.” A Reuters poll supports Greenwald’s argument. The poll showed that 80% of users have not purchased a product or service based on Facebook’s ads or comments. If Facebook hopes to get its pace of revenue growth to rebound, it may have to undefinedexecute another basketball move–something that Wieser calls a “pivot.” Pivots are not uncommon in the tech world. Wieser recalls the early days of YouTube, which started out as a dating site with videos, but once the company realized the more universal appeal of online videos it decided to do without the dating part of its business. Facebook could decide six months from now that they have another way to make money, instead of advertising.” Wieser says possible alternative business models may include e-commerce, media sales (like Netflix) or selling music (like Apple’s iTunes). When Google went public in 2004, the company made $1.7 billion worth of stock public (20 million shares.) “Had Facebook issued a third of those shares, the stock price would be in the $40s,” Pachter says. A $40 stock price any time soon sounds like a tall order for Facebook, given its uncertain business model and the ocean of shares now in the hands of public investors who may be of the mind to get even and get out. To be fair, of course, Facebook is not the only newly public social networking stock facing trouble. Remember some of the other disastrous IPOs over the past 12 months, like Groupon, Pandora and Zynga? They’re all down sharply from where they traded when they came public, and Groupon and Zynga have been hammered even further year to date.
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