The once-dizzying rise in the value of privately owned Facebook Inc. has slowed, a sign the social network hasn't been immune to broader market volatility or the weakness in the global economy.
Despite the cooling, Facebook next year still is expected to make one of the largest U.S. initial public offerings ever. For now, its stock is traded on secondary marketplaces where wealthy investors and institutions can purchase shares offered mostly by former employees.
Facebook share prices surged 70% to $34 in March from December, as reported in auctions by SharesPost Inc., a trading platform for stocks of privately owned companies. The growth since has leveled off, with shares trading at $35 or below. Facebook's price has fallen 8% since July, to $32.10 in a SharesPost auction held last week, valuing the entire company at roughly $77 billion.
Facebook isn't alone, or even the worst hit of its bretheren. Hot technology companies that have gone public in recent years also took hits in the market-wide downturn. The Standard & Poor's 500-stock index has dropped 16% from its April peak, during which time the Nasdaq Stock Market Internet index has slid 21%.
Investors and analysts say the price of Facebook's stock, owned mostly by employees and outside investors, can't easily be pinned down because trades take place in a variety of venues, some of which don't disclose the prices. Also, valuations based on just a few buyers and sellers might not reflect how a company would be valued if millions of its shares were traded publicly.
Jim Friedland, who follows the Internet sector at Cowen & Co., says Facebook and competitor Google Inc. are susceptible to a slowdown in advertising spending if the economy slides into a recession. He and other analysts say there is little sign of slippage in Facebook's longer-term growth trajectory.
Nor is the recent share-price weakness likely to affect the timing of Facebook's IPO expected next year. Google, which went public in 2004 at a value of $23 billion, now is valued at about $163 billion.
Some analysts have cut their projections for Facebook's 2011 advertising revenue. EMarketer, which tracks Internet ad spending, has reduced its forecast of Facebook's ad revenue by 6.1% from the start of the year to $3.8 billion.
Facebook's total first-half revenue doubled to $1.6 billion from a year earlier, said a person familiar with the matter. EMarketer projects that Facebook still is on track to more than double its total revenue to $4.27 billion from $2 billion last year. In addition to ads, Facebook collects revenue from the sales of virtual goods within social games.
Debra Aho Williamson, an eMarketer analyst, says some advertisers remain unconvinced of the effectiveness of social networking as an ad medium. Some don't feel the need to purchase Facebook ads because the marketers can use free fan pages instead, she says. Facebook has lost some short-term revenue as it has tweaked its ad placement and inventory, she said in an eMarketer report.
Facebook declined to comment.
Estimates of the company's current value range between $60 billion and $80 billion. The wide variation depends on which recent trade or per-share valuation is used, as well as the number of shares outstanding, which is estimated between 2.3 billion and 2.5 billion.
David Weir, chief executive of SharesPost, adding that demand has been "steady." said.
"We've certainly seen a softening of the price over the last couple of months."
He attributes the decline to the several factors:
- Recent stock market volatility.
- Google's unveiling in late June of its Google+ social-networking service.
- Questions about whether Facebook will push back the timing of its IPO because of the broad market weakness.
Trades at SharesPost and other trading venues showed that Facebook stock surged in January on news that Goldman Sachs Group Inc. was making an investment that valued the company at $50 billion. Prices rose to about $30 a share in February and March from $20.85 in January, then peaked at $34 to $35 in August, according to Larry Albukerk, founder of EB Exchange Funds in San Francisco, who acts as a broker on private-market trades of companies that aren't public. He saw trades as low as $31.50 last month.
Three mutual funds that have reported holding Facebook shares reported that the stock jumped at the end of last year and made more modest gains, if any, in the middle of this year.
A Morgan Stanley Investment Management mutual fund, Multi Cap Growth Trust, first reported holding a Facebook stake valued at $13 a share as of Nov. 30. The same fund reported that the price soared 69% by the end of February. From there, it rose 14% to $25 by the end of June, the most-recent data available.
Fidelity Investments, which first reported holding Facebook shares valued at $25 on March 31, carried the shares at the same price on June 30. T. Rowe Price, which also valued its Facebook stock at $25 a share on March 31, said the shares rose to $28.34 apiece on June 30. Another fund, GSV Capital Corp., valued its Facebook shares at $29.28 each on June 30.
Shares have slumped for several Internet companies that have held recent IPOs. LinkedIn Corp., a business-networking site that went public in May, has fallen 31% since mid-July. Online music provider Pandora Media Inc., which went public in June, has fallen 39% since July 1. Google, whose stock price rose eight times between its IPO and its peak in 2008, has dropped 19% since late July.
COMMENTARY: So who the hell owns Facebook shares? LearnVest prepared the following chart, and most of the stock is owned by Facebook insiders, namely CEO and co-founder Mark Zuckerberg (24%), Dustin Moskovitz (6%) and Facebook staffers (30%) for a combined total of 60%. The other 40% is owned by outsiders, mostly investors.
If you've been following my blog posts for the last several years, I have been very critical of social networks, and especially Facebook for several reasons:
- The ad-supported revenue model of social networks is very flawed. It was a quick-and-dirty attempt by early social networks like Friendster to monetize their sites. Facebook copied the same revenue model, and it has remained relatively unchanged to this date.
- Facebook recently had to shutdown Facebook Places and Facebook Deals. These services were supposed to be big revenue blockbusters, but they never panned out. Clear evidence that Facebook may not be the revenue platform that has been invisioned.
- Many marketers remain unconvinced that social networks are an effective advertising platform, and the numbers seem to bear this out. Clickthrough rates from social networks are even lower than search engines. Only about 50% of small businesses are actually using social networks, but they are spending very little, preferring to stay with traditional advertising channels like print, direct marketing and mass market.
- Social networks don't make anything tangible so they are next to impossible to value with any degree of accuracy, resulting in wild variations in the stock prices of social networks.
- Anytime a website does not charge anything for you to use their services, then YOU are the product. T his is essentially what Facebook, Twitter, LinkedIn and other social networks are doing. They are selling YOU to advertisers. They talk in terms of delivering X number of males or females within certain demographics that appeal to specific advertisers.
- Social network valuations have been based mostly on investor exhuberance, hype, the "Facebook Halo Effect" and a whole lot of future potential. There is no attempt to utilize commonly accepted business valuation methodologies like discounting future earnings or cash flows to arrive at a present value that factors in risk and uncertainty.
- Secondary brokers of private company stock like SharesPost and SecondMarket have created a private country club of investors, that bid on auctions of very small parcels of shares of high visibility private companies like Facebook, Twitter, Zynga, Groupon and foursquare. Prices are artificially over-valued because of the very high scarcity factor since the number of shares floated represent less than 1% of the total outstanding shares.
- The majority of social networks, whether private or public, are owned by a few key insiders and investors, who can easily manipulate and control share prices by parceling out shares for sale through secondary market brokers.
- In a blog post dated March 23, 2011, I pointed out that Facebook's ad-supported revenue model had reached a critical inflection point where growth in users begins to slowdown. This also eventually leads to a slowdown in the growth of advertising revenues. When market pentration in users finally reaches the saturation point, advertising revenues will eventually peak. Since advertisers pay for advertising impressions or eyeballs, once the saturation point is reached, there is no incentive for them to continue to pay higher cost-per-thousand ad rates. Advertising spending on social networks eventually peaks, stalls or grows very little, and individual social networks can only grow by cannibalizing each other. In effect, social networks reach a zero sum game.
For a long-time Zynga has been using Facebook as the exclusive platform for its highly popular social games. However, it was reported in a recent SEC filing. that Zynga's profit fell from $27.2 million in Q2 2010 to $1.3 million in Q2 2011, a 95 percent decrease. This brings into question whether Facebook will be an effective platform for social games. Social games generated an estimated $300 million in revenues for Facebook in 2010, and expected to generate $500 million in 2011.
Courtesy of an article dated October 6, 2011 appearing in The Wall Street Journal, an article dated January 17, 2011 appearing in Business Insider
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