Facebook (FB) shares hit a new low Tuesday, as the recently listed stock tumbled another 6.2% to $21.71 a share, with 48 million changing hands. Three trading sessions after the No. 1 social-network reported earnings that showed decelerating user growth, concerns about share valuation are far from over.
Facebook has now lost nearly 43% of its value since its May-18/$38 a share IPO price. The double-digit slide in share-price has reduced the co.’s market cap to less than $41 billion – more than half its IPO launch value of $100 billion.
There seemed to be three factors hanging over the stock Tuesday.
The first was a report from Bernstein Research analyst Carlos Kirjner that valued Facebook’s display advertising business at only $19 a share.
While Kirjner lifted his rating on the stock to “Market Perform” from “Underperform”, he cut Facebook’s 12-month price target to $23 from $25:[via Forbes] ““We believe that Facebook is worth $19/share (10 times estimated 2014 EBITDA plus cash) valued just as a display advertising business gaining market share due to its fundamental competitive advantages based on scale, user data and identity. These $19/share do not assume upside from its social advertising capabilities and do not give Facebook any credit for upside from yet-to-be-defined businesses based on its distinctive assets, such as its social graph. Because these “upside” opportunities are still highly uncertain, we value them at $4/share based on our sizing of such upside opportunities and our judgment of the probabilities they will come through, leading us to our $23/share valuation.”
The second worrying factor is what happens on Aug. 16 when a lock-up period expires. Over 211 million shares could be added to Facebook’s current float of 484 million shares. Up to 355 million shares may be added to the float in October. Over the next two quarters, over 1.7 billion FB shares will become freely tradable.
Kirjner warns that the lockup’s expiry may pressure the stock for the next few months. He suggests that a buying opportunity would arise when the stock dips below $20:[via Forbes] “While these are well known facts and should (in theory) be already reflected in the stock price, history suggests that there is a good chance of transient pressure on the stock price as liquidity increases abruptly. We would see a buying opportunity if FB were to trade around or below $19/share.”
Finally, a commerce site called Limited Run, late on Monday publicly called into question Facebook’s user-number claims.
According to Reuters, the Internet startup claimed that 80% of its ad-clicks on Facebook came from bots, and only a fifth from genuine users.
Even with its 6.2% drop Tuesday, Facebook shares still trade at more than 33x Forward P/E, versus Google’s (GOOG) 12.8. Does Facebook deserve to trade at such a premium? We don’t think so, especially since its advertising efficacy, which accounts for almost 90% of the Menlo Park company’s revenues, has again been questioned – reviving doubts about FB’s ability to sustain its rich valuation. So there may be more downside for Facebook from current levels.