Facebook Stock Plunge Slashes $34 Billion of Market Value

Facebook Inc. (FB) has lost about $34 billion in market value since its May initial public offering, as the operator of the world’s largest social-networking service fails to assuage concerns about how it can make more money from almost a billion users.

Facebook’s stock dropped 12 percent yesterday, its biggest one-day loss on record, after its first quarterly earnings report as a public company. That brought the plunge to 38 percent since the May 17 debut, which at $16 billion was the largest ever for a technology company. Chief Executive Officer Mark Zuckerberg’s fortune plunged to $12.1 billion yesterday from $13.7 billion, according to the Bloomberg Billionaires Index.

“Investors were always paying for potential for Facebook,” said Aaron Kessler, an analyst at Raymond James & Associates in San Francisco, who has a market perform rating on the stock. “Clearly, today people are willing to pay less for that potential, which may be a few years out still.”

Of the largest IPOs on record, no other company has lost so much value so quickly, data compiled by Bloomberg show. General Motors Co. (GM) raised $18.1 billion after expanding its November 2010 offering and gained value in the comparable period, as did Visa Inc. (V), which generated $19.7 billion when it listed in 2008.

The decline of $34 billion is more than many companies’ total market value, including Whole Foods Market Inc. and Time Warner Cable Inc. That’s based on a share count of 2.4 billion.

Expensive Valuation

While the stock decline has been steep, Facebook is still more than twice as expensive as rival Google Inc. (GOOG) and most of the Nasdaq Internet Index, as measured by price-to-earnings ratio. It’s grappling with shareholder concerns about slowing sales and user growth, and whether new revenue sources, including mobile, can boost results quickly.

Even with that drop in the stock price, the company remains more expensive than Web portal Yahoo! Inc. (YHOO), video-rental services provider Netflix Inc. (NFLX) and online travel company Priceline.com Inc. It’s also more expensive than about 10 percent of the Standard & Poor’s 500 index.

Facebook’s debut as a public company was marred by technical glitches, and the stock managed to close above $38 only on the first day of trading. The company had first proposed a price range of $28 to $35 before raising it to $34 to $38 just days before the IPO.

In the second quarter, year-on-year advertising growth slowed to 28 percent, compared with 37 in the first quarter. The number of daily active users grew 4.9 percent from the first quarter, down from growth of 8.9 percent in the previous period, Facebook said in its earnings report.

Photographer: David Paul Morris/Bloomberg

Mark Zuckerberg, founder and chief executive officer at Facebook Inc. Close

Mark Zuckerberg, founder and chief executive officer at Facebook Inc.

Close
Open
Photographer: David Paul Morris/Bloomberg

Mark Zuckerberg, founder and chief executive officer at Facebook Inc.

Spending Surge

Sales in the second quarter increased 32 percent to $1.18 billion, topping the average estimate of $1.16 billion, according to data compiled by Bloomberg. Monthly active users rose to 955 million, exceeding the 950.1 million prediction by analysts surveyed by Bloomberg.

The revenue increase was dwarfed by a surge in spending on marketing and sales, which ballooned to $392 million. The company reported a net loss of $157 million, or 8 cents a share, and profit excluding certain costs of 12 cents a share.

The second-quarter operating margin, excluding certain costs, was 43 percent, a drop from 53 percent a year earlier. In addition, Facebook’s operating expenses are expected to rise “significantly” in the second half of the year, Chief Financial Officer David Ebersman said on the conference call.

The earnings report and call -- the most highly anticipated earnings release since Google’s inaugural figures in 2004 -- gave management its first chance since May to make a case to Wall Street about its growth prospects.

Twitter, Google

“A little bit of earnings guidance, a little bit of optimism about future performance would have been nice,” said Jordan Rohan, analyst at Stifel Nicolaus & Co. in New York, who has a hold rating on Facebook. “Facebook trades at a premium to many companies, including Google, and is only growing at a slightly faster pace than companies like Google.”

Shareholders sought assurances that the company can keep users engaged amid rising competition from Twitter Inc. and Google and that it can overcome challenges making money from advertising on mobile devices.

Facebook said in May that sales growth wasn’t keeping pace with user expansion as more people access the service with mobile phones. The number of ads delivered in the U.S. decreased 2 percent last quarter even as the number of daily users increased 10 percent, Ebersman said on the call.

Mobile Challenges

“Ad impressions continued the recent trend of growing more slowly than users as more of our usage is on mobile devices,” Ebersman said. “This trend is particularly true in markets such as the U.S., where smartphone use is expanding rapidly.”

Facebook has had little time to gain traction in mobile advertising, having just announced its inaugural mobile- advertising platform in February.

Zuckerberg, who gave opening remarks on the call, said mobile is a key area of focus for the company. Mobile users, who make up more than half of the membership, are more active than counterparts who use only the desktop version, he said.

“Mobile is a huge opportunity for Facebook,” Zuckerberg said. “Our goal is to connect everyone in the world. And over the next five years, we expect 4 or 5 billion people to have smartphones. That’s more than twice as many people as have computers today.”

Early Promise

Early results on mobile ads show some promise, according to AdParlor, which provides services for marketers. Click-through rates are 15 times higher on mobile than on desktops, while the pricing is 30 percent less, according to AdParlor.

Owing to the success of new services, Facebook should boost both mobile and desktop advertising revenue in the future, Chief Operating Officer Sheryl Sandberg said on the call. Still, the company must educate companies about how to best advertise on a social service, still a relatively new avenue for marketers, she said.

“It took a long time for the TV market and advertising to be truly understood, it took a long time for search, and I think we’re still in that learning curve with a lot of our clients,” Sandberg said. “If our ads work -- and we continue to make our ads work and they work for advertisers and our users -- we’ll be able to educate the market over time.”

Facebook derives most of its revenue from ads that reach users as they post comments, embed videos or check photos uploaded to the site by friends. The company also makes money when users pay for digital items, including on games made by Zynga Inc. (ZNGA)

Facebook’s price-to-earnings ratio is 51.5, while Google’s is 18.7, according to data compiled by Bloomberg. Online retailer Amazon.com Inc. (AMZN) and vacation rentals provider HomeAway Inc. (AWAY) are among the Nasdaq Internet index members more expensive than Facebook.

“We believe Facebook is a good company, under good management, with solid growth prospects as it continues to gain share of online and offline advertising,” Rory Maher, an analyst at Capstone, wrote in a note. “However, we believe the current valuation assumes the Company will grow several new, large businesses over the long-term and we have no indication that this is feasible.”

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.