Facebook (FB) Fails as the Stock Plunges to New Lows

Shares of social media giant Facebook (FB: Charts, News) are currently down over 40% since its first day of trading, when the stock barely closed above its IPO price of $38. Since then, Facebook's much maligned IPO, which disappointed investors who were expecting performance on par with industry peer LinkedIn (LNKD: Charts, News), has been the subject of widespread ridicule and derision on Wall Street.

The company's market cap has shrunk from $52.7 billion to a humbling $38.8 million, claiming the dubious title of the worse performing large IPO in recent history. Daily Chart
Facebook's upcoming lockup expirations has also kept investors at bay. The first lockup expiration date, on August 16, will allow non-employee shareholders to sell their IPO shares, while several subsequent rounds, ending in May 2013, will allow employees to unload their shares. The August 16 lockup expiration will also allow institutional shareholders, such as Goldman Sachs (GS: Charts, News), Microsoft (MSFT: Charts, News) and Excel Partners, to sell their shares, which could increase selling volume considerably as these companies scramble to cover their losses. However Microsoft, a long-time Facebook stakeholder, is unlikely to sell its shares, as it views Facebook as a key ally in the battle against search behemoth Google (GOOG: Charts, News). Over the next nine months, an approximate 1.91 billion shares could be sold by insiders. This should dilute shares considerably and make Facebook stock an unattractive investment in the near term, considering that only 500 million shares are currently available for trading. Susquehanna International analyst Herman Leung commented, "Even the investors that I talk to who want to buy the stock and like the company are not sure if they can stomach the lockups." For its second quarter, Facebook grew its sales by 32%, which was a sequential decline from the 45% it posted in the first quarter. Sales are forecast to grow a respective 29% and 28% in 2013 and 2014, which will fail to top its prior sales growth. Although its sales growth is robust, Facebook's numbers fail to justify its feverish trailing P/E of 121 and forward P/E of 34.5. The stock also trades with a 5-year PEG ratio of 1.6, which hints at sluggish growth ahead. The slowdown at social games maker ZyngaZNGA, which accounts for 12% of the company's revenue, has also cast doubts on the growth potential of the digital goods market in uncertain economic times. Investors and analysts are also concerned about Facebook's privacy settings. Facebook's privacy violations, in which private information was made visible to the public, were the subject of a high profile settlement with the FTC last November. In the settlement, Facebook was required to "provide clear and prominent notice" to users whose private information was reset. Facebook also became subject to privacy audits every two years within the next two decades. In addition to privacy woes, Facebook also failed to comply with the Safe Harbor Framework agreement for data transfers in the United States and the European Union. These lapses in privacy and security have caused many investors to doubt the sustainability of Facebook's business model, in which user data is mined for advertising revenue. Although Facebook shares have fallen fast and far to all-time lows, investors should be aware that the stock's heated multiple makes this a dangerous stock to own. High expectations, which have plagued the stock since its IPO, will be impossible to meet, as sales growth shrinks on a year-over-year basis. Awkward statements about monetizing mobile, which the company has failed to do, and creating a branded smartphone have confused investors, who believe Mark Zuckerberg may be grasping at straws to keep his company afloat in the cutthroat environment of Wall Street. Other News About FB Facebook Settles With FTC Over User Privacy Issues Facebook concedes to FTC demands. Facebook Lock-Ups Expire: Like It or Leave It? Will Facebook insiders dump this lemon of an IPO? Other Stocks in the News Can Groupon Survive? Groupon is treading water - can it stay afloat. FedEx to Offer Voluntary Buyout to U.S. Employees FedEx attempts to reduce its workforce in uncertain times. 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Published on Aug 14, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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