(By Mani) Shares of Facebook, Inc.
(NASDAQ:FB) fell as much as 14 percent and dropped lower than its IPO price of $38 as investors felt that the company's share price was overvalued amid growing skepticism over its fundamentals.
The steep fall in price the second day of its trading is a big disappointment for an IPO as hyped as Facebook, whose offering attracted tremendous investor appetite. The Mark Zuckerberg-led social networking giant increased the size of offering to 421.2 million shares from its original size of 337.4 million. Facebook also raised the price range of IPO to $34 - $38, from $28 to $35.
Several analysts were of the view that the underwriters overpriced Facebook, whose market price should have been around $34. If shares were priced at $34, then it could have increased to about $40, climbing at least 18 percent.
Facebook shares were lackluster on its opening day falling back to the IPO price of $38 after advancing 13 percent. They just added 23 cents on its trading debut on May 18.
Investors became skeptical over the lofty valuation of Facebook amid concerns that its revenue and profit would hurt if users increasingly access Facebook on tablets and smartphones where it has limited presence. It currently does not show ads on mobile devices.
The exit of General Motors Co. (NYSE:GM) added further proof to this view. GM, the third largest advertiser in the U.S. after P&G (NYSE:PG) and AT&T (NYSE:T), shelled out nearly $10 million on Facebook advertising last year out of its $1.78 billion ad budget. GM says its paid ads on the Facebook have little impact on consumers' car purchases, according to a report in the Wall Street Journal.
Advertising on Facebook remains at an early stage despite its monthly users approaching the one billion mark. Its users are highly engaged on a daily basis with each other and brands/content both within Facebook and outside the platform's walls via Facebook Connect.
If more paid advertisers opt out of Facebook, then it would significantly hurt its topline. The revenue contribution from ads has been declining for the past few years. In 2009, 2010, and 2011 and the first quarter of 2011 and 2012, advertising accounted for 98 percent, 95 percent, 85 percent, 87 percent, and 82 percent, respectively, of its revenue. For the first quarter, Facebook said ad revenue was sequentially down 7.5 percent, while its profit fell 12 percent year-over-year.
California-based Facebook is yet to monetize its surging user base on tablets and smartphones and those are big roadblocks given the exponential rate of growth in mobile usage over personal computers for the foreseeable future.
Facebook currently does not show ads on mobile devices as it currently does not have the technology to display ads on the small factor devices such as smartphones and tablets. Also, the company has no technology for mobile-payments and is yet to capitalize on emerging technologies such as Near Field Communication (NFC).
While the value/impact of advertising is always subjective, advertising on social media has been scrutinized to a greater degree as brands and investors wonder whether consumers are interested in brand messaging while they are engaging in social networking. For instance, using Facebook is highly considered as a utility than a media platform to interact with brands.
Another hiccup on the investors minds would be the monetization strategies of Facebook. Facebook currently has two monetization mechanisms namely display ads, which is based on cost per 1000 page views (CPM) impressions and performance based ads, which is based on CPC (Cost per Click).
The challenges of leveraging Facebook become even greater, and more time consuming, due to its global reach and consumers' shift to mobile devices, with far smaller, less ad-centric screens than laptops and PCs. More than 10 percent of total Internet usage is now on mobile more than doubling 2010 levels.
"While we "poke fun" at the quality of Facebook display advertising today, mobile advertising is at an even earlier stage of development, with Facebook having only recently introduced sponsored stories and offers on mobile devices (smartphones and tablets)," BTIG analyst Richard Greenfield wrote in a note to clients.
The analyst, who has a "neutral" rating on Facebook shares, is not even sure what forms mobile advertising will ultimately take due to screen/display space as vertical blocks of display ads is difficult to imagine in a mobile Facebook product.