FaceBook hit hard after IPO over valuation stares investors in the face

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FaceBook shares fell 8.5% in the regular trading session yesterday to $26.85, following game developer Zynga’s disappointing earnings which sent their shares down 38% (Zynga produces games for the FaceBook platform). Then came FB’s earnings report after Wall’s Street close and the shares tumbled another 11% to $23.97, an all time low after failing to deliver a forecast for the rest of 2012 and announcing rising costs. The company came to the market at $38 a share back in May and have had a rollercoaster of a time following a botched IPO on Nasdaq, peaking at $45.

Mark Zuckerberg

For the second quarter, the company grew revenue 32% to $1.18 billion slightly higher than expected and produced a net loss of $157 million, or 8 cents a share, compared with net income of $240 million, or 11 cents a share, for the same period in 2011. Revenue growth of 32 per cent year-on-year in the second quarter was a deceleration from growth of 45 per cent in the first three months of 2012. Adjusted earnings for the recent period were $295 million, or 12 cents a share in line with expectations. The quarter produced a loss due to stock based compensation payments associated with the IPO, with costs which almost tripled to $1.93 billion plus capital expenditure increased to over $400 million.

Monthly average users (MAUs), were 955 million at the end of the quarter, up 29% from the same period last year. Daily average users, or DAUs, rose 32% to 552 million. Investors are worried that the significant growth in mobile FaceBook users will hit earnings as it is more difficult to monetize advertising on this platform. Mobile MAUs, increased 67% to 543 million during the quarter.

As well as concerns about increasing mobile usage over desktop, the company warned that expenses would continue to rise as they recruited around the world. The company announced recently it would significantly upscale its operations in London for example.

With the shares at a p/e of over 50, any stumble in its earnings performance was always going to lead to a large drop in the price. After Apple’s set back on Tuesday, US technology investors have plenty to condense now and investment returns in social networking sites like FaceBook and Linked-In remain highly questionable given their unrealistic valuations at IPO. The odds seem high that FaceBook will drop below $20 given the lack of imminent product development.

Contrarian Investor UK


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