Facebook’s Roller Coaster Ride

Jyoti is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The year 2012 has been a bag of mixed surprises for Facebook (NASDAQ: FB). From its initial public offering at $38 in May 2012, it went all the way down to a mere $17.55, a decrease of almost 53 percent within a span of three months. And when almost everyone had given up on Facebook, they fought back and ended the year at around $27. The journey is quite similar to a roller coaster ride, as you can see in the chart below:

<img src="/media/images/user_13976/facebooks-swinging-pendulum_large.JPG" />

*Source: http://money.cnn.com

Let us look at the reasons behind this swinging pendulum of Facebook’s stock prices.

Reasons for Such a Steep Drop:

Overpriced IPO: The company’s initial price of $38 was overpriced, as per the expectations of many analyst. This led to an initial dip in the company’s share prices within its first few days of trading. Traders expected the company to go down in the first few months, and that is the reason the stock became bearish in its initial days.

Acquisition of Instagram: When Mark Zuckerberg announced the acquisition of Instagram for a mammoth $1 billion, people started questioning the sustainability of Facebook on a long term basis (though later it was devalued at $730 million). Despite the fact that Instagram is one of the most popular photo-sharing social-networking services, its acquisition at such a high price was not justified.

Revenue Model: Of all the reasons, the biggest reason has been their inability to display a long term sustainable revenue model. Just like Google’s Orkut, which after its initial success had a steep downfall, many are predicting the same downfall for Facebook. This raised a lot of questions on keeping the shares for the long term. At that point of time, even Mark Zuckerberg was unable to convince people with his words. The result was visible as the share price dipped by around 54 percent.

The Comeback Phase:

Magical Figure: Facebook achieved the magical numbers of 1 billion monthly active users, the only social networking company to achieve this. The biggest asset for any social networking company is the number of users it can attract, and Facebook did outperform its competitors by a huge number in this regards.

Commercialization: After a long wait, Facebook finally started to commercialize and add more revenue generation options. The humongous database acted as a beneficial option in attracting many brands.

Mobile Advertising: The technology world has rapidly shifted from desktops to smartphones. This means that advertisers need to target the new audience in a smarter way. Facebook did lag behind the others in terms of developing its mobile platform for advertisers. But better late than never, they have developed the tools for advertisers to market their products on the smartphones. This did help in convincing its shareholders, thus resulting in a boost in its share prices.

What’s Next in Store?

Facebook can expect tough competition from Google’s (NASDAQ: GOOG) Google Plus, the social networking website. Though it has not gained much popularity since its release it is slowly and steadily gaining numbers, which can be alarming for Facebook. Not only that, Google is its biggest rival in display ads. It is expected that Google will beat Facebook in terms of market share of display ads.

The other company they need to keep an eye on is LinkedIn (NYSE: LNKD). The primary difference between them is that LinkedIn specializes with networking people in professional occupations. This attracts a different segment of customers to it. Though Facebook did introduce Glassdoor services in order to compete with LinkedIn, LinkedIn still holds the edge in this segment. The other important thing is that LinkedIn is able to generate revenue of $1.30 for every hour a user spends on their site. This displays a more stable future and generates more investor confidence.

Facebook is currently trading at around $31, an increase of 16 percent over the last month. They are showing positive signs in terms of revenue growth and mobile advertisements. The Q4 results are expected to come in on Jan. 30. There are positive vibes coming from these results, and thus many investors are laying their hands on the stock at the current comparatively lower prices. Can Facebook sustain this upswing? Or is it just the heat of the moment (anticipation for the quarterly results)?

jyotiadvisor has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and LinkedIn. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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