SAN FRANCISCO (AP) — Facebook stock sank another 5 percent to a new low Friday amid concerns about the Internet social network's ability to woo increasingly skeptical advertisers and weather another wave of potential selling by its major stockholders.
THE SPARK: Although Facebook Inc. shares have already lost half their value since their ballyhooed debut on Wall Street in May, BMO Capital Markets analyst Daniel Salmon predicted the stock will fall even further during the next six months as more selling restrictions on major shareholders expire. Discussions with an assortment of advertisers also led him to conclude that Facebook is having difficulty proving its website can be an effective marketing vehicle.
Those concerns caused Salmon to lower his price target on Facebook's stock to $15 per share from $25. The dramatic markdown represents Wall Street's latest strike against Facebook, which has seen its shares steadily decline from a high of $45 on their first day of trading on May 18. The shares were priced at $38 in an initial public offering that valued the company at $104 billion. Less than four months later, Facebook's market value is now hovering around $50 billion.
The decline has been driven by a realization that the company's revenue isn't going to grow as rapidly as people envisioned during the breathless run-up to the IPO. The company's second-quarter revenue rose 32 percent from the same time last year, a healthy rate, but not as impressive as the growth that made Internet search leader Google Inc. a hot stock after its IPO in 2004. When Google was about the same size as Facebook is now, its quarterly revenue was nearly doubling from the previous year.
Unlike the state of technology after Google's IPO, people are now increasingly surfing the Web on mobile devices instead of personal computers. That trend has posed a problem for Facebook as it tries to figure out how to display ads on the smaller screens of smartphones and tablet computers.
To compound the challenges facing Facebook, the agreements that prevented its early backers and other insiders from unloading their stock are starting to expire. The first ban, or "lock-up," expired two weeks ago, allowing Facebook insiders to sell a combined 271 million shares. Financier Peter Thiel, Facebook's first outside investor, seized on that opportunity by selling about 20 million of his shares and another key investor, Accel Partners, distributed tens of millions of its shares to its limited partners. The distributions freed those limited partners to cash out of Facebook too.
The selling shackles will come off about 1.7 billion more Facebook shares between mid-October and May 18 of next year. The biggest lock-up expires Nov. 14 when about 1.2 billion shares are released from their restraints.
Salmon and other analysts are worried Facebook's stock is bound to drop even lower if more shares flood the market at a time of investor skittishness.
THE BIG PICTURE: With nearly 1 billion users, Facebook boasts a massive audience and its website has the means to make valuable insights about people's lives and tastes. Those two assets provide the building blocks for what could become a moneymaking machine as the company finds more ways to connect advertisers with the people most likely to buy their products and services.
There's also a good chance that many Facebook insiders will hold on to their stock after their lock-ups expire.
For instance, Facebook CEO Mark Zuckberberg owns a big chunk of the 1.2 billion shares eligible to be sold in November, but he has given no indication that he plans to winnow his holdings. Microsoft Corp., another major shareholder, also has signaled it intends to hold on to its stock because it prizes its partnerships with Facebook.
THE ANALYSIS: Although he expects Facebook's stock to sag in the short term, Salmon offered hope for a rebound next year. "We expect investor attention to return to fundamentals after the technical challenges presented by lock-up expirations over the next six months have been absorbed by the stock," Salmon wrote in a Friday research note.
SHARE ACTION: Facebook's stock shed 93 cents, or 4.9 percent, to $18.16 in Friday's afternoon trading. The shares had fallen as low as $18.08 earlier in the session.