Just four months ago, on May 18, around 15% of Facebook was floated for the first time with the shares priced at $38. They closed last week at $21.66, down 43% since the float, wiping some $45 billion off the company’s initial market capitalisation.
Victoria Snell, a consultant at Capgemini Consulting asks the questions of what has gone wrong – and how likely is it that Facebook will be able to turn its financial performance around in the years ahead?
Blame was focused initially on the float itself. David Ebersman, Facebook’s Chief Financial Officer, was criticised for selling too many shares and pricing them too high. Technical glitches experienced by the NASDAQ on the day of the float were also blamed.
But attention is now focussing on more fundamental factors:
- Facebook has just one platform and online display advertising is its main revenue stream (unlike for example Apple and Google who have multiple platforms and revenue streams). The dramatic “shift to mobile” of recent months makes it essential for Facebook that it can advertise on mobile platforms. The company has been slow to adapt to this new reality.
- The float enabled the initial Facebook investors to cash out of the company – Facebook director Peter Thiel for instance has sold shares worth over $1 billion and co-founder Dustin Moskovitz has sold shares worth close to $150 million. The selling is likely to move into a new gear later this year when Facebook employees, who together hold some 2 billion shares, get their first chance to sell them. Further selling will add to downward pressure on the share price.
- Facebook management – and Mark Zuckerberg in particular – are perceived by financial markets as being more interested in the company’s mission (“to give people the power to share and make the world more open and connected”) than in its share price. This does not go down well on Wall Street.
Logic suggests that the share price has further to fall. Facebook’s price / earnings (P/E) ratio based on 2013 earnings estimates stands at 32 compared to 13 for Google and 12 for Apple. The long term Wall Street average is 15. This suggests that Facebook’s current share price is unlikely to be sustainable.
So what room is there for optimism about Facebook’s future? Facebook investors are drawing heart from the following:
- Facebook may have been slow in adapting to the “shift to mobile” but (as Andrew White mentioned in his September blog) it is catching up quick. In effect it had no mobile advertising six months ago but has recently launched native apps for Apple and Android systems and is talking up their prospects.
- Facebook remains the most visited website in the United States (above even Google). This is a huge strength and one that Mark Zuckerberg announced last month that he plans to exploit by moving Facebook into the search engine market (probably in conjunction with Microsoft and its Bing search engine). As Zuckerberg said last month, Facebook already processes around a billion search requests “and we basically aren’t even trying”.
- Facebook is well placed to benefit from the potential opening of new markets – China in particular, from which the company is currently excluded.
The fact that Mark Zuckerberg and Facebook management are able to ignore concerns around the company’s short term financial performance because they are so firmly in control of their own company (with only a small part of it in public ownership) is – perhaps perversely – seen as a strength. This means that they can focus instead on long term product development. Over time, if they make the right choices, this could be very positive both for the company and its share price and should demonstrate to businesses out there that “f-commerce” is most definitely not a lost cause.
The fact that the Facebook share price has rallied in recent weeks (up more than 20% from a low of $17.55 at the beginning of September) will encourage the optimists.
1st October 2012