Will This Social Media Stock Gain Back Its Lost Value?
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I have said this previously also and I am saying this again: though a company’s performance is not dependent on the investor’s perception of the company, its stock’s performance is surely dependent. It is this perception that drives the stock price low even if there is potential in the company, which obviously the investors failed to notice, and it is this perception that drives the stock price high even when the future growth prospects are not that strong, but, perceived strong by the investors.
Earlier this year, when the company made its first public offering, the investors rushed to buy the stock and in the very beginning the stock's price reached an irrationally high figure of $45 per share. Since then the stock price of Facebook (NASDAQ: FB) has been falling just like the company’s growth rate. In the third quarter of 2010, much before going public, Facebook had flagged a revenue growth of 104% which reduced to 54% by the end of 2010 and the figure went on dropping and currently stands at only 32%.
Though Facebook has seen some resurgence lately, and the stock has moved above the $20 mark after recently dropping below $19, the stock is still trading at a price more than 35% below its IPO price of $38 in May. The IPOs of Internet companies have been victims of mixed success. While Groupon has lost more than 45% of its value since it went public last November, LinkedIn (NYSE: LNKD) has been a huge success as the stock has gained nearly 55% since it started trading in September 2011. Investors were of the opinion that FB’s potential equaled that of mighty corporations such as Apple, Google (NASDAQ: GOOG) and Microsoft. However, similar to Groupon, Facebook turned out to be a disappointment, at least as of now.
The primary reason for the fall in the price is the lack of investor confidence in the ability of Facebook to show significant and steady top line growth. Like I already pointed out, the social networking giant has been consistently flagging lower revenue growth and this is surely not providing much confidence to its investors. The slower revenue growth can be attributed to slowing new user growth, competition and definitely market saturation.
Unlike LinkedIn, FB does not have a very good mix and diversity in its revenue base. LinkedIn posted an impressive 89% revenue growth over the year ago period when it reported its earnings in August, and this was not just one quarter of such performance. The professional network giant has been repeatedly beating estimates and reporting growth rates above 80% for the past two years. LinkedIn does not depend heavily on advertisement revenue, like Facebook, and instead benefits from its diverse offerings which includes subscriptions and job postings apart from advertisements.
Recently, Facebook CEO Mark Zuckerberg addressed a tech audience where he said “Facebook is all about mobile.” But, is this really a good thing? While there is truly a lot of scope in the mobile segment, the question is will FB be able to use the scope to its own advantage? Nearly 57% of FB’s monthly average users use mobile devices to access their FB accounts. When this piece of information is added to the fact that the company hugely depends on ads for revenue creation, the total outcome does not look favorable for the company.
In order to continue making money, FB will have to continue bombarding users with ads and this is something which the users will surely not like. Maybe, for the remaining 43% online ads won’t matter. But the population using mobile devices will surely not like this arrangement. While accessing the FB account from a mobile device, the user is already trying to cope with the smaller display and on top of that if the display shrinks further due to ads popping up all the time, the user will not be happy. In such a situation how can the company expect to grow its user base?
Again, in the online ad space, FB is up against the world’s largest online search provider Google. The Android maker has recently pepped up its search engine by tailoring its searches according to the preferences of the users and this has helped to increase its revenues substantially. As per Google’s most recent earnings announcement, the company has successfully increased the number of clicks by a whopping 42%.
In order to increase revenue growth, Facebook needs to come up with new ideas to make money from its huge number of users. During the recent tech conference, which I mentioned in the previous paragraph, Mr. Zuckerberg hinted that the company may also launch its own search engine. His point is everyday millions of users use FB to look up information about someone on the social network, search for apps and information on brands. FB has a huge wealth of information which the company is not currently using, but this provides big opportunities for the future.
The company collects private conversations, records of photos, marriages, deaths and loads of personal user-specific data. Thanks to its huge collection, FB can very successfully develop its own search engine and also through such information FB can help companies provide better suited and more effective advertisements. However, there are limitations to this. First, after fighting in the online ad space FB will again have to arm-wrestle with Google, the king of the online search world. Google has a far superior business model and a much tighter grip on online search and online advertisement markets. Secondly, the company may face issues related to privacy of the users and may also face threats from the US Federal Trade Commission.
Though there are good growth opportunities in the market, keeping in mind all the difficulties discussed above, I feel it will be very difficult for Facebook to generate impressive revenue growth numbers any time soon. Too little online ads will result in lower revenues, while too much ads will result in a fall in number of users. Facebook is trading at a price which is more than 35% lower than its IPO price. Unless the company comes up with a new money making product or expand its user base by entering new geographic segments, the stock’s chances of gaining back its lost value is looking impossible.
analyse360degree has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, Google, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.