What is happening to Facebook’s shares?

Facebook has lost a quarter of its value since going public last week. What is happening, asks Jason Hesse.

When Mark Zuckerberg rang the NASDAQ bell remotely from Palo Alto on Friday, he had a huge grin across his face. The social network he had founded in 2004 was going public, valued at more than $100 billion. Since then, his grin has been wiped right off.

Contrary to expectations, the IPO did not result in Facebook stocks rising to infinity and beyond, becoming every investor’s darling. Instead, the stock closed at just 0.6 per cent higher than its IPO price of $38. Earlier in the day, the company had reached a market capitalisation of $104 billion. But from that happy point, the stocks have turned right around, heading in the wrong direction.

Today, the company’s market capitalisation is $72.76 billion. More than a quarter of the company’s worth has been wiped out since it went public. What is happening?

The truth is, from the minute Zuckerberg hit the bell, things started to go wrong for NASDAQ-FB stock. The stock and the company was overvalued.

There are rumours that Facebook and Morgan Stanley, its lead underwriter, purposefully set the IPO price at the higher end of the range, so as to get more pre-IPO investors, such as Goldman Sachs and Accel Partners, to sell more of their stock. But this also meant that when the public got the opportunity to get its hands on Facebook stock, everyone soon realised that the promised demand just wasn’t there. Worse, hours after opening, Morgan Stanley had to step in to prop the stock up from dipping below the IPO price. Not a good sign on your first day.

“The underwriters completely screwed this up,” Michael Pachter, an analyst at Wedbush Securities, tells the WSJ. “The offering should have been half as big as it was, and it would have closed at $45.”

He isn’t the only analyst to criticise the IPO. In a research note on Monday, Richard Greenfield, an analyst at BTIG, wrote: “Facebook’s IPO priced at a level well above where we foresaw compelling 12-month returns. With revenue and earnings growth decelerating this fiscal year, we find Facebook’s current valuation unappealing.” Ouch.

According to Richard Holway, from TechMarketView, Facebook should have been valued closer to $50 billion than $100 billion. He tells The Kernel: “I think it’s grossly overvalued and is likely to prove a poor medium-term investment. Much of the news around the IPO has been negative. Indeed even I have been surprised at how many of my friends have turned against Facebook.”

He says that all of the real gains to be made have probably already been made by Facebook’s early investors, and that we should expect Facebook shares to fall further. “We hear rumours that there are big short orders out, which rather suggests a fall is on the cards. It’ll be interesting to see how much.”

There may be a short-term fall in Facebook stock, but there is little doubt that Facebook will continue to grow, as I discussed in my analysis last Friday.

The company’s numbers are massively impressive: 901 million monthly active users of which 536 million are daily active users. Last quarter, Facebook recorded revenue worth more than $1 billion, 82 per cent of which came from advertising.

With nearly a billion monthly users, the company is a force of nature. The question is, at what pace can it grow? How much more can the company grow its user base?

More than 900 million people is enormous, but could the company realistically double its monthly users? Anecdotal evidence would suggest not. How many people do you know who aren’t on Facebook? Do they seem likely to want to join anytime soon? If anything, as privacy concerns continue to grow, more people will leave the social network.

Naturally, the company’s growth could come from new sign ups. Facebook’s largest market is Europe, with more than 230 million users. This means more than one in four people in Europe are signed up to and use the social network. So realistically, there is little scope for this to grow significantly – if you’re not on Facebook already, the chances are you just don’t care and won’t join anytime soon.

Facebook’s second-largest market is Asia, with 195 million users. This geography offers an opportunity for the company. The Asian population is the largest on the planet, with more than four billion people. But, of course, the vast majority of them don’t have access to the internet, so Facebook’s growth is squandered there too, for now. I could go on…

For the company’s stock to return to solid growth, it will need to deliver solid results. More users, more advertising, more revenue.

Unfortunately, there is no magic trick. Facebook will soon have no excuse to not be monetising its mobile users, of which there are nearly half a billion. The company splashed out $1 billion on Instagram towards this, but how will Facebook leverage the profitless photo sharing app to make money?

Zuckerberg and his team will now come under intense pressure for the company to up its game. Going public can raise a lot of money for a company, but equally the market will focus on its failings and can be extremely unforgiving. For Facebook, it’s time to see results, fast.