When you stoke a bonfire a little too much, it can easily turn into a wildfire and consume your neat camping site, then proceed to turn the entire surrounding area into a smoldering heap of cinders. The development following the Facebook, Inc. (NASDAQ:FB) IPO is a similar situation.
Traders were ecstatic when FB CEO Mr. Zuckerberg rang the NASDAQ opening bell and set afloat the shares of his giant social media baby on May 18. The IPO was marred by technical issues which were not such a big problem in the long run compared to what happened only days later.
Confused traders were going from ecstasy to catatonic fits as they saw their shares drop at an alarming rate. Various factors seem to have contributed to a slide that is still ongoing and is now steeper than ever and shows no signs of reaching a bottom. Among those was trading the company at more than one hundred times its earnings for a full twelve months back and the flood of shares that hit the market. The current figures look more than a little dreary – FB has shrunk by about $50 billion, the money vanishing into thin air and investors left to have a tall glass of cold water.
Chairman and CEO Mr. Zuckerberg hardly felt much of a sting, though, as he prudently cashed 30 million of his shares just 4 days after the IPO. That move landed him a staggering $1.13 billion, at share prices less than 50 cents below the super-inflated IPO price and $16.7 above yesterday’s close. Shareholders cannot help but wonder why a man who believes in the future of his company would be so hasty in monetizing. Another question is should a good public company executive be more concerned about the noble mission of bringing the world together than about his shareholders’ interests. An excerpt from an IPO-related filing from FB states, in Mr. Zuckerberg’s own words: “we don’t build services to make money; we make money to build better services.”
There is more to worry about with FB. The management of the company stated its various concerns in their first public 10-Q report. Investors would want to know that practically all FB revenue comes from advertising and the so-called microtransactions for the purchase of virtual goods in applications. Zynga alone has generated 12% of Q2 revenue and ads nested in Zynga product pages account for 4% of total Q2 revenue. Those alone are unsettling numbers, considering how Zynga has been holding up recently.
The report also reflects the ever-growing number of users who access Facebook through mobile devices where ads are not shown and FB’s ability to monetize on them is “unproven”. With the prospect of exponential growth of mobile users, Facebook’s ad-driven income, or their consummate income as is the case, may quickly dwindle.
While retail investor anger over suffered losses can largely be attributed to buying in on the hype, Facebook still looks like a colossus, propped on legs that can support its own weight but can easily give in if someone came along and kicked it in the shins. The future of the company is uncertain at best, with possibilities to actually perform at the level the IPO set but also with a possible outcome where their competitors and users indeed decide to kick them in the shins and watch them crash and burn.
