The slide in Facebook Inc. stock that has cost investors $25 billion may not end until the shares drop another 20 percent, leaving the company’s valuation on par with competitors that also do business over the Internet.
Facebook, with a market capitalization of $79.1 billion, is trading at 29.5 times the company’s projected 2014 profit of $2.69 billion, data compiled by Bloomberg show. The stock would have to dive to $23.07 to match the average price-to-earnings ratio for the Nasdaq Internet Index based on estimated earnings in the next 12 months, according to the data.
Investors have pummeled shares of Facebook since its initial public offering, citing concern over growth prospects for the largest social-networking service. Shareholders filed lawsuits that said the company and its underwriters overpriced Facebook at $38 a share. The IPO gave Facebook a higher multiple than 99 percent of the Standard Poor’s 500 Index.
“It could fall quite significantly because it was priced at a significant premium,” Sameet Sinha, an analyst at B. Riley & Co., said in a telephone interview yesterday. “Such stocks -- when they go out of favor -- tend to fall before stabilizing.”
Facebook slipped below $30 yesterday for the first time, falling to $28.84 and surpassing its previous low closing of $31, which was set on May 22. In German trading today, the stock fell 2.1 percent to the equivalent of $28.41 as of 10:06 a.m. in Frankfurt.
Facebook, based in Menlo Park, California, may struggle to make money from a user base that’s increasingly accessing the site via handheld devices.
The company said this month that advertising growth isn’t keeping pace with gains in daily users, and in April reported first-quarter profit fell 12 percent as sales growth slowed and marketing costs more than doubled.
Based on a trailing earnings of $974 million, Facebook trades at a price-to-earnings multiple of 81 times. The Nasdaq Internet Index, whose members include Amazon.com Inc., Google Inc., EBay Inc. and Yahoo! Inc., has a ratio of 35.4 times profit in the past year and 23.5 times projected earnings.
Bullish investors are speculating that surging demand for social-media stock, coupled with earnings growth faster than analysts’ estimates, will justify Facebook’s valuation.
“This a company that’s growing and changing rapidly,” Arvind Bhatia, a Dallas-based analyst at Sterne Agee & Leach Inc., said in an interview yesterday. He has a buy rating on the stock and a one-year price estimate of $46. “Google looked expensive for a long, long time. That’s what happens with companies that are changing and disrupting industries.”
Cheaper Than LinkedIn?
The pace of Google’s yearly profit growth has averaged 73 percent since its IPO in 2004, according to data compiled by Bloomberg. While the company’s trailing 12-month multiple has slumped more than 70 percent since its 2004 debut, shares of Google have surged 599 percent from its IPO price through yesterday, the data show.
Bhatia’s price target is based on 30 times estimated earnings before interest, taxes, depreciation and amortization of $3.9 billion in 2014. He said Facebook is cheap relative to companies like LinkedIn Corp., which surged 109 percent in its first day on May 2011 and trades at a valuation more than 5 times higher than the Nasdaq Internet Index’s multiple, based on estimated profit in the next year.
“It’s a botched deal but the company hasn’t really changed,” Bhatia said, referring to Facebook. “Had these guys come out public in that initial price range, it would’ve been considered a big success.”
At the time of its IPO, underwriters led by Morgan Stanley set a price that valued Facebook at 107 times reported earnings in the last 12 months, more than every S&P 500 stock except Seattle-based Amazon.com and Equity Residential, a real estate investment trust in Chicago. The valuation made Facebook, co- founded in 2004 by Harvard University student Mark Zuckerberg, the largest technology IPO of all time.
The company and Morgan Stanley have faced criticism for increasing the number of shares to sell by 25 percent to 421.2 million days before the offering and pushing the asking price to $34 to $38 from $28 to $35.
Facebook increased less than 1 percent to $38.23 on May 18 in a day marred by delays, cancellations and mishandled orders. Robert Greifeld, the chief executive officer of New York-based Nasdaq OMX Group Inc., said a “poor design” in software driving IPO auctions caused the mishaps.
The company, while having long-term potential, has been hampered by some investors getting more shares than expected, said Ryan Jacob, chief investment officer at Jacob Asset Management. Also, investors may be concerned about shares that will become available for trading after a so-called lock-up period ends, he said.
“It will find a floor,” he said. “Fundamentally, I think there’s a lot of optimism. But there are these near-term issues that the stock has to get past.”
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