Facebook's ongoing pains as a newly public company continued Friday as shares dropped to a new low following signs the company's growth is slowing.
Shares of the No. 1 social-networking company ended the day down $3.14, or 11.7%, to $23.70, which not only notched a new low but also marked a nearly 40% decline from the company's initial public offering price.
The stock price's vicious downdraft, despite the fact the company is earning a profit and increasing its customer base, highlights the "disconnect between the stock and the company," says John Fitzgibbon of IPOScoop.com.
Given Facebook's stature in the emerging field of social networking, investors expect more. Additionally, investors fear that the rise of mobile as a point of access for Facebook users will likely continue to be less profitable than the Web for the company, creating a possible further drag on revenue and profits in the future.
Shares suffered following the company's first earnings report as a public company late Thursday, which showed a dramatic slowdown in revenue growth year over year, despite meeting official Wall Street estimates on profits.
Revenue grew 32% in the second quarter, down from the nearly 45% growth in the first quarter. Meanwhile, costs during the second quarter jumped 295%. But its user base continues to grow, up 29% from a year ago to 955 million active monthly users as of June 30.
The falling value of Facebook shares could trigger more questions about CEO and founder Mark Zuckerberg's leadership and vision of the company's long-term course. But Arvind Bhatia, an analyst at Sterne Agee, says Facebook's mobile future is just starting to unfold, and few doubt Zuckerberg's standing as the one to lead charge.
"The stock has not been performing and people have a tendency to call leadership into question," he says. "But I don't get the sense that people are questioning his vision. People are looking for some place to blame. A few on Wall Street had been vocal about it. It'd be scary for investors if Zuckerberg was out of the picture."
Bhatia added that investors are more concerned about the company's immediate direction and are seeking better communication. "What we are talking about are issues that will take a little bit of time to figure out. But in the long term, ad dollars have followed eyeballs."
Investors also were spooked by the rate of slowdown in its revenue, which registered "only" a 32% jump from a year ago vs. a pace of 45% in the first quarter. While few expected the company to maintain the triple-digit rate of growth it once had, the year-over-year slowdown rate detailed in its first earnings call as a public company â€" coupled with its lack of clarity on how it would seize more mobile ad sales â€" is convincing investors to jump ship and sell, analysts say.
Facebook relies mostly on advertising, which accounts for 84% of its total revenue. Its ad sales grew 28% in the latest quarter to $992 million. But the disconnect between its revenue source of traditional online advertising and the changing consumer behavior toward mobile preferences continues to rattle investors and Facebook executives. More than half of Facebook users click on their phone to access their account.
Facebook said as much â€" that the mobile user base is growing faster than its mobile ads â€" in an attempt to temper analysts' expectations for continued sales growth. But the company's cautionary tone has largely failed to register among investors who seek unabated growth from new IPOs.
Facebook did introduce a phone app several years ago and has about 543 million monthly mobile users. But the company started generating mobile ads for the first time this year.
"The earnings call provided little confidence that Facebook has made any significant inroads into this problem, and many investors commented that they would have liked a more elaborate plan and forecast to alleviate their concerns over future profit growth," says Andreas Pouros, COO of digital marketing agency Greenlight.
Offering and integrating compelling advertising on small screens is a difficult challenge enough, he says. Ceding control to other companies â€" such as Apple and Google â€" that have their own operating systems and are more tightly integrated to the hardware could be costly to Facebook, he says. "In the mobile battle, Google and Apple remain far ahead of the pack," he says.
Facebook's more immediate strategy in boosting mobile ads will include a greater reliance on premium ads and corporate-sponsored stories in news feeds, Bhatia says.
Facebook recently said it'll increase its offering of premium ads, which appear on the right-hand side of its display and often feature videos or apps. It's also in the beginning phase of the rollout of sponsored stories, which encourage Facebook users to push brands and advertisers by clicking the "like" tab, then displays them as direct endorsement from friends in their news feeds.
Premium ads and sponsored stories trigger action from consumers five to 10 times more than other types of ads and render three times the rate of return for advertisers, says Bhatia.
The company "reported results that were modestly ahead of our expectations; however, the (conference) call lacked granularity around" the company's outlook in the second half, according to a report by Anthony DiClemente of Barclays. He lowered his 12-month price target on the stock to $31 a share from $35.
Bhatia agreed that the company's lack of "forward guidance" on its financials put downward pressure on shares. While Bhatia remains bullish on the company in the long run and considers it a "core holding in tech portfolios," the stock will remain volatile quarter to quarter as it struggles to deal with a key operational and financial issue â€" how to make money from mobile ads.
While rumors have circulated in recent months that Facebook will launch its own branded-phone, the company largely quashed the rumor during the earnings conference call Thursday. The statement confounded Pouros, who believes Facebook will continue to lose control over its users' mobile experience unless the company makes a dramatic move. "If a Facebook phone is now not in the cards, Facebook remains without a solid answer to its mobile problem," he says.
Facebook continues to be a glaring example of a poorly performing IPO. So far this year, of the 83 IPOs to start trading, just 29, including Facebook, are down from their IPO prices, says IPOScoop.com. A majority of the IPOS â€" 52 â€" are higher. Yet, IPOs are struggling as a group. The FTSE Renaissance U.S. IPO Index, which tracks the performance of recent IPOs, is down 0.2% this year.
Despite Facebook's woes, it's far from the worst ever IPO in its first 49 days of trading. Internet-based phone service Vonage plunged 62% from its $17-a- share IPO price on May 23, 2006.
Still, Facebook's decline is dramatic. "It's going from bad to worse," says Fitzgibbon. "It's been a train wreck from the start."
The fallout from the first earnings call also shows Facebook may have been a victim of hype and inflated expectations, analysts say.
"People are waiting for a really huge growth moment in revenue, advertising, dollars per user," Alex Ashby, research analyst at Global X Funds, a provider of a social media exchange-traded fund, told the Associated Press. "People had expected that Facebook is going to revolutionize advertising. … We think it's still a definite possibility, but maybe further down the road."
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