So What’s The Story About Facebook Stock?

0d74f599be44bdab9d153fa98f17e369Today’s Struming deals with one of personal favorite topics, Facebook. I had the opportunity to visit the Facebook offices in Menlo Park, CA earlier this year. They are an impressive operation. But the market has been beating them up in their 3 months as a public company.

Facebook is omnipresent, right? Virtually everyone under 30 has an account and the penetration of Facebook among all ages rises daily. Facebook is approaching 1 Billion worldwide users, that’s a lot even if 8% of them are your dogs, bogus accounts or dead. Isn’t Facebook one of the biggest business successes of all time? Yes. What other product has 1Billion worldwide users and had such an impact on people’s live in so short a timeframe?

So if that’s the case, why is its stock getting hammered? And why are people asking if its bubble has burst?

This is where I give you the caveat that while I am financially smarter than the average bear, I am woefully less smart than those who live in the financial world on a daily basis. But since emotions, not mere economics, are playing a role in Facebook’s stock price decline, it’s easier for me to provide my Monday morning quarterback analysis (in my Wednesday morning Struming).

For those who weren’t paying attention, Facebook went public in May and its stock was initially priced at $38 a share. The stock price just 3 months later is roughly half this amount in the $19 range. Ugh. Not a great investment for those who jumped in early.

In hindsight there are several reasons for the decline:

1. The shares were overpriced to begin with. “Irrational exuberance” as Greenspan once said.

2. Nasdaq did them no favor by technologically screwing up the Facebook launch.

3. Facebook is an immature financial business that is still figuring out how to live in a mobile world.

Even at the current price, Facebook trades at roughly 30 times its earnings, or roughly twice the average price/earnings ratio. Therefore, hypothetically the Facebook share price still has lots of room to decline further.

Compounding their woes are the “lockup periods” which have begun to expire for early Facebook insiders allowing them to sell their shares. Companies that go public appropriately often force insiders to hold on to their stock for a period of time, to prevent the market from being swamped with shares. In Facebook’s case this is very difficult, because the stocks’ value has fallen beyond expectations which creates a greater temptation for a sell off which can hasten yet additional share price declines. In addition, a bunch more shares will be eligible for sale in November so further declines may be in the offing.  Beyond the obvious issues of declining value, a low stock price also makes it difficult for Facebook to attract and retain employees (despite the free food for all employees), key to their present and future.

So is this the beginning of a period of decline for Facebook? Is the bloom off the rose? Will they become the next Myspace?

No, for a variety of reasons:

1. Facebook is a phenomenon with worldwide influence. It will continue to increase its user base, albeit at a lesser rate of growth.

2. Already successful in building an advertising model, Facebook will figure out how to better monetize 1 billion eyeballs (or I guess that would be 2 billion eyeballs, unless Polyphemus is a user). The power to deliver messages to that big an audience is mind blowing.

3. Facebook will learn how to live in a mobile world and not primarily rely on PC based users. This may be their biggest challenge.

4. Facebook will learn to manage financial expectations better, one of the keys in the financial markets.

As a public company, the new Facebook has to live in the financial world of business projections, earnings calls and shareholder expectations. That’s new stuff for Facebook and for social media whiz Mark Zuckerberg. He may be in “over his hoodie”. But there are tons of smart people in Menlo Park. They’ll figure it out.

However, if you think owning shares of Facebook stock would be “cool” and you have not done so yet, then I suggest waiting until later this year because there may be better bargains to be had.

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  1. Beth Frances Rosoff Strum says:

    facebook could you use some consult from you here.

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