Facebook's success is based on consumers and businesses "liking" each other. But so far, the company is turning its investors into haters.
In a little more than two months since its initial public offering, Facebook has gone from being a stock that investors fought to own to one they can't get away from fast enough. Wednesday, it set a new low and closed down 83 cents at $20.88 -- 45 percent below its $38 offering price, making it 2012's third-worst IPO.
"Investors aren't enamored with it anymore," says Richard Peterson of S&P Capital IQ. Anyone watching the unrelenting drop may wonder how Facebook's star dimmed so quickly on Wall Street. Four reasons:
Disconnect between serving consumers vs. investors. The fact that Facebook seems more concerned about designing products than finding ways to profit from them is irking investors, says Colin Sebastian of Robert W. Baird. For instance, Facebook created software for tablet devices without a plan for generating revenue, he says.
The fear is intensified as the company must adapt as more users engage with Facebook on mobile devices, says Victor Anthony of Topeka Capital.
Disgust at the company's first quarter as a public company. Slowing growth in users and profitability were already key concerns. The hoped-for positive earnings surprise when it reported last week didn't happen. Instead, investors got more concerned as they dug into the results, says Francis Gaskins of IPOdesktop.com. Some disliked the way Facebook excluded costs connected to stock-based pay from its adjusted earnings, he says. Second-quarter net income of $295 million dropped to a loss of $157 million after all the stock costs are included.
Overhype from the start. A company with such lofty expectations is going to disappoint unless it's able to amaze investors, Peterson says. The company's valuation crept to unreasonable levels due to thin trading on private markets before the IPO, he says. "It was like a self-fulfilling fallacy," he says.
Looming deluge of shares. Later this month, 91 days after the IPO, employees and insiders could sell 268 million more shares on top of the 2.1 billion already outstanding.
"Investors aren't willing to give companies the benefit of the doubt," Sebastian says. "And with companies like Facebook, which are speculative, giving the benefit of the doubt is too much to stomach right now."
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