Aug 162012

Facebook is hitting the skids again and according to CNNMoney, its life as a public company has been a nightmare. As with most public IPOs, Facebook’s initial stock offering included a “lockup” agreement which requires early investors to hold their shares for a set period. That prevents the initial market from having shares dumped, driving down the price. But one of the lock-up periods ended Thursday and whether or not investors sell, it has made others skittish that they might. Some 271 million additional shares can now be sold, though many early stakeholders (for example, Microsoft) will probably hold their shares.

Facebook Stock Chart - Year-to-Date

Facebook Stock Chart – Year-to-Date (Fox Business News)

But this is only the first of many rounds Facebook will have to endure in this:

The big Facebook stock dump could come in mid-November. That’s when Facebook will convert the special form of restricted stock units, or RSUs, held by most of its staff into actual shares of its stock. 

Obviously, employees may have a much larger incentive to sell – prompted by a “let me take my investment while I can” attitude. All total, some 1.8 billion shares will be potentially released over the next nine months – today’s action boosted the available shares on the market by 60%, but it’s only 14% of what will become available in the future. Of course, the lower a stock goes, the more attractive it becomes – Netflix CEO Reed Hastings just bought a million shares of Facebook but he is a member of the board. I doubt many others will follow up on his move.

There’s enough talk on the Web that this means the “end” of the social network bubble. Everyone in the arena is trying to figure out ways to bring in revenue especially on mobile platforms and a few such as Zillio and LinkedIn have done well. While it may not be something like the bust back in 2000, investor expectations clearly got ahead of themselves. From the Huffington Post (July 27th):

With a few exceptions, the first wave of social media firms to trade on the public markets has delivered a disastrous performance that conjures memories of the dot-com bust of 2000.

“Farmville” publisher Zynga, which went public in December at a valuation of $7 billion, is trading around $3.15 a share, more than 68 percent off its $10 IPO price.

Daily deals site Groupon, touted as the firm that could reinvent local commerce, has fallen from its $20 IPO price to about $7.15 in nearly nine months. Music service Pandora Media has dropped from $16 at its June 2011 IPO to around $10 on Friday.

For now, let’s just leave it where Bloomberg News does: Facebook goes down as the worst large IPO on record. Zuckerberg, time to do some more of those serious all-night marathon coding sessions.

Jul 312012
Facebook logo image


Facebook is already down significantly from its opening high, and it appears headed much lower. The past three days have seen declines (now down to $21.83 as of Tuesday afternoon) and with declining user growth and no forecast for the year (did they not get the idea that you need to make earning and growth projections as a publicly held company?), investors are spooked. Even worse, there is potential deluge of over 200 million shares being dumped on the market beginning August 16th when the lockup period on employee owned shares expires. If the IPO wasn’t bad enough, earning Facebook and permanent place in business textbooks, the post-IPO slide of Facebook stock makes it appear that the debacle is continuing.

Of course, many people at Facebook will still walk away with millions of dollars, but many investors will wish they had never heard of the stock. So much for ethics and a little common sense in the stock market. Here’s the bad news from Reuters:

Facebook Inc’s shares dived 6 percent to another record low on Tuesday, sliding for the third straight day since a lackluster quarterly report showed decelerating user growth.

Investors have punished the stock of the No. 1 social network and other consumer-focused Internet companies such as Zynga Inc, questioning their ability to sustain growth and maintain lofty valuations. Last week, Facebook reported results but offered no outlook or forecast for the year, spooking investors who sought reassurance about growth in 2012.

Wall Street is also bracing for a potential deluge of millions of shares after August 16, when a post-IPO lockup period on employee share sales expires.

Despite having shed 40 percent of its value since a May 18 IPO, Facebook still trades at about 47 times forward earnings, versus Google Inc’s 15 times.

On Tuesday, Bernstein Research analyst Carlos Kirjner upgraded Facebook to market perform, but estimated the lockup’s expiry could unleash up to 211 million shares.

He valued Facebook’s core display business at just $19 a share. But he said the company’s potential around its innovative social graph was worth a $4 premium. Bernstein set Facebook’s 12-month target price at $23.

Stock predictions are notoriously unreliable but I suspect that many investors would love to see a share price of $23. But if Facebook’s mobile initiatives do not pan out (advertising revenue is very much at stake here) and user growth continues to decline (this is the future of the company), $23 dollars a share may seem hopefully idealistic.

Jun 022012

Now that the Facebook IPO has had a week on the market, we have a better sense of what happened. But despite the bungled opening by NASDAQ (investors not having confirmations of their trades), the insider information given to preferred clients, the real problem seems to be that Facebook has already matured as a company. A mature company in the social network arena? A word of explanation here.

In the initial stages of a successful technology company, financial results are blowing away expectations. Not only is a company beating everyone’s predictions, they’re beating the general consensus about the market – that’s it’s not possible to even make money in this market segment. This was true of Google and search; equally true of Apple and digital music. As a result, investors are willing to assign an extremely high multiple to earnings.

It was most definitely true of Facebook and social media, except that in the early days (I know, only a few years back) Facebook wasn’t doing an IPO. But in doing the IPO this year, Facebook has already matured and revenue growth is shrinking rapidly. Google went public earlier in it’s corporate life and the result was that investors reaped the rewards of its growth – for the first five years its stock price continued to rise; for the past four, it has languished in the same range.

Henry Blodget details the problem in Business Insider:

Because Facebook’s business is decelerating rapidly–advertising revenue grew only 37% in Q1–and the company is no longer “beating expectations.” Facebook is also already a big mature business, with more than $4 billion of revenue and $1 billion of earnings.

The best way to see this is in a graph of Facebook’s Revenue Growth. And what the graph doesn’t show is the risk it faces in trying to increase its revenue stream without alienating its 100′s of millions of users. Trying to monetize the “Like Button’ can bring about a backlash as in the recent case that was settled out of court with five users angry about their profiles being used in advertisements (more on that later).

Blodget’s conclusion is not that Facebook is a doomed company, it’s just a mature one saddled with wildly inflated expectations. A large number of people made off very well in this IPO as they were in at the beginning; just don’t expect the same now that the public can weigh in on its value.

Chart-Facebook Revenue Growth

May 192012

Don't like sign for FacebookWhat a day in the market for the highly anticipated Facebook IPO.

Facebook struggled to move above its $38 per share opening price and while it opened at $40.05 and briefly made it to $42 a share, it sunk back down to $38. It might have gone lower in the final 20 minutes of trading and it appears that the underwriters were forced to purchase shares to keep the price above $38 (see the brief analysis in Business Insider).  So, a lot of hype, a small increase, a near embarrassment, and we end up right where we began at the opening.

What happened? A couple of things conspired to weaken the demand in the open market including the following:

  •  Everyone is still talking about GM pulling its advertising on Facebook even though there is no broader move to do the same by major advertisers – just bad timing
  • The market is generally weak with fears that Greece may leave the Euro this summer
  • The 25% increase in shares offered took care of the demand that there was
  • Some of the “smart money” seemed to be selling – never a good sign when investors are getting ready to buy
The last two are probably the most significant factors and despite the public’s fascination with social media, the demand for the stock had already dried up. As the LA Times put it:

But perhaps the biggest blunders came in recent days as the company and its largest shareholders moved to maximize their profits at the expense of new investors.On Monday, Facebook raised the stock’s projected price to a range of $34 to $38 from the initial $28 to $35, and priced it at the peak of $38 on Thursday. That made Facebook far more expensive than established competitors such as Apple Inc. and Google Inc. based on the companies’ earnings.On Wednesday, the company announced that longtime investors led by Goldman Sachs planned to sell big chunks of their holdings in the IPO. That struck some investors as greedy and a sign that Wall Street insiders were getting out while they could.

In short, greed got the better of everyone involved. While many employees and early investors became millionaires many times over, the broader market decided to wait it out. The market can do anything and Facebook’s share price could easily move up over the coming weeks. But this is no Linkedin with a 49% surge on the first day. The wisdom of the crowd prevailed.
 We’ll see what happens next week.
NASDAQ Welcomes Facebook in Times Square

NASDAQ Welcomes Facebook in Times Square

May 182012

With the Facebook IPO taking off this morning, there are now a thousand new millionaires in the world due to the sale of Facebook stock. A few will be closer to billionaires – and a couple of the founders, billionaires many times over (though none with the new net worth of nearly $20 billion for founder Mark Zuckerberg). But many of the employees will do very well for themselves depending on the date they joined and their role in the company.

If you’re curious as to how this works, here’s a helpful chart from Business Insider that lays out the paths by which many employees will find this their lucky day while others – and no doubt some former employees – will wish things had gone differently. For a different view, take a look at the interactive graphic at Business Week that conveys the new-found relative wealth of the founders, investors, employees and some former employees.

Just in case there were doubters (and there are a few), Zuckerberg had programmers do one of their all-night hackathons last night to show that they are still hustling to move ahead. They better – with $3 billion in revenue, Facebook is valued at over 100 times historical earnings in contrast to Google’s 19 times and Apple’s 14 times.

Facebook Employees - the Path to Becoming a Millionaire

Facebook Employees - the Path to Becoming a Millionaire