To anyone who follows technology in particular or business in general, it has become clear that the Facebook IPO (Initial Public Offering) was, to put it lightly, a major disappointment. The Facebook IPO was supposed to be a financial victory that fit neatly into the timeline (no pun intended) of one of the most successful technology companies in history. But since going public, the value of Facebook shares (and by extension, of course, the value of Facebook as a company) have plummeted. This is not how things were supposed to go. But Facebook is young and the company has plenty of time to recover, so we wanted to cut through the negative press about the IPO to examine where Facebook shares are potentially going and where they have been. Basically, what is Facebook worth, and just as importantly, what should Facebook be worth?
The first question is easy to answer. As we write, Facebook shares are trading at a little under $28 (although they will no doubt continue to fluctuate). When the company went public, Facebook priced their shares (or overpriced their shares, as the majority of investors evidently think) at $38. This means that the company has lost over a quarter of its value since going public only a few weeks ago. Anyone who bought stock on the day of the IPO has lost money; in fact, essentially anyone who has bought stock up until this point has lost money, considering shares have trended in one direction: downward. Of course, major shareholders have lost the most, and the biggest of them all, CEO of Facebook Mark Zuckerburg, has lost billions.
How did the hottest stock on the market fall so spectacularly? Investors think the company is dramatically overvalued, at least at this point, and for one main reason: the company’s revenue prospects do not justify a valuation of $38 a share. According to data compiled by Bloomberg, Facebook is trading at almost 30 times its projected profit for 2014, making its price-to-earnings ratio out of line with other companies that are members of the Nasdaq Internet Index. (Such companies include Amazon, Google, and Yahoo.) In order for Facebook to fit the norm, its stock would need to slip even further, down to around $23 a share. Facebook is not currently taking in enough revenue, nor is it expected to take in enough revenue in the near future, to justify its valuation leading up the company’s IPO. The $38 share price was presumably arrived at because of Facebook’s potential to make money. One way or another, Facebook will be able to parlay its 900 million users into an enormous revenue stream, or so the thinking went, and the market has declared this way of thinking flawed. Facebook, in short, was getting ahead of itself.
So, what should Facebook be worth? This is the multi-billion dollar question, one which potential investors in Facebook will think long and hard about. Should investors buy stock now, betting on the long-term growth prospects of Facebook? Or should they completely avoid the company until its value, as defined by share price, comes back to earth? (And, to be sure, some argue that the company isn’t worth investing in at all.) This is what makes investing difficult. If Facebook becomes what it aims to become – basically a social media layer that blankets our interactions with technology – it could have the potential to make staggering sums of money. The extent to which Facebook becomes integrated into our lives is the extent to which it can generate revenue. However, the tech landscape is scattered with the skeletons of once mighty companies. What looks like a brilliant move today may look like a foolish wager tomorrow. As it stands, Facebook is hovering in the land of potentials, simultaneously capable of stunning triumph or utter collapse.
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