Facebook

4 reasons investors don't 'like' Facebook; and how to fix it

Facebook's success is based on consumers and businesses "liking" each other. But so far, the company is turning its investors into haters.

n a little more than two months since its initial public offering, Facebook (FB) has gone from being the stock investors were fighting to own to one they can't get away from fast enough.

Shares continued to fall Thursday, dropping 84 cents, or 4.0% , to close at a new low of $20.04. The stock is the third-worst IPO this year, down 47% from its $38 offering price.

"Investors aren't enamored with it anymore," says Richard Peterson of S&P Capital IQ. Facebook is "under a lot of pressure."

Investors watching the unrelenting decline in Facebook shares, shortly after a feeding frenzy for the IPO, may wonder how its star dimmed so quickly on Wall Street. Analysts and IPO observers point to four key reasons the stock has been so disliked:

•Disconnect between serving consumers and serving investors. The fact that Facebook seems more concerned about designing products for its users than finding ways to profit from them is irking investors, says Colin Sebastian of R.W. Baird. For instance, Facebook created software for tablet devices without a plan for generating revenue, which is opposite to the kind of strategy investors are looking for, Sebastian says.

he fear is intensified as the company must adapt as more users engage with Facebook on mobile devices, says Victor Anthony of Topeka Capital. Not only is Facebook not positioned to deliver ads to mobile users, but the rates advertisers are willing to spend on mobile ads are much lower than even the rates paid for ads displayed on the website, he says.

•Disgust at the company's first quarter as a public company. Slowing growth in users and profitability were already key concerns. So investors were hoping for a positive earnings surprise when Facebook reported last week. First, the surprise never materialized. Then, the more investors dug into the results, the less they liked what they saw, says Francis Gaskins of IPOdesktop.com. Some, for instance, disliked the way Facebook excluded many of its costs connected to stock-based pay from the adjusted earnings it reported, he says.

While rivals Google and LinkedIn also don't adjust for stock compensation in their reported earnings, investors were stunned at how big of a difference it made at Facebook, Gaskins says. Facebook's net income of $295 million in the second quarter drops to a loss of $157 million after all the stock costs are included.

•Overhype from the start. A company with such lofty expectations and valuations is going to disappoint unless it's able to amaze investors, Peterson says. The company's valuation crept to unreasonable levels due to thin trading on private markets before the IPO, he says. "It was like a self-fulfilling fallacy," he says. Even after its drop, Facebook trades for 72 times its earnings the past 12 months, well above the 18 P-E of the industry, Reuters says.

•Looming deluge of additional shares. While the market is already having trouble absorbing existing shares, more are about to hit as employees and insiders are freed up to sell. Later this month, 91 days after the Facebook IPO, an additional 268 million could be sold on top of the 2.1 billion already outstanding.

How to fix it

Now, the question is what, if anything, Facebook could do to repair its image with investors. A few suggestions from analysts and IPO observers include:

•Make Mark Zuckerberg chief technical officer. Investors would rather have a CEO that has more experience dealing with Wall Street's demands, says Francis Gaskins of IPOdesktop.com. Investors think Zuckerberg's behavior during the roadshow highlights his desire not to get overly consumed with the stock, he says. "He's not cut out to be the CEO of a hard-driving Silicon Valley company responsible to investors," he says.

But as Zuckerberg owns 57% of the Facebook vote, a change like that is unlikely, Gaskins says.

•Put making money on mobile access a top priority. The shift of Facebook's audience from the website to mobile devices is causing investors to worry about the company's long-term potential. Facebook needs to be clearer on how it will manage this critical transition, says Arvind Bhatia of Sterne Agee. It needs to "explain how the mobile transition, while challenging in the short term, will be lucrative," he says.

•Underpromise and overdeliver. Facebook needs to be more precise with investors, explaining what market it's going after, how big the revenue for the market could be and what its piece could be. "This story needs to be communicated well and the long term shown more clearly," Bhatia says.

But Facebook needs to be careful to guide investors to reasonable and obtainable objectives. "One thing investors like is underpromising and overdelivering," he says. "That pays off more often than not."

more @ http://www.usatoday.com/money/perfi/stocks/story/2012-08-01/facebook-stock-woes/56658246/1