Facebook's Free Fall
Cox, Rob, Newsweek
Byline: Rob Cox
There's no bottom in sight.
It would be all too easy to wager that Facebook's market meltdown is coming to an end. After all, Mark Zuckerberg's social network incinerated as much as $50 billion of shareholders' wealth in just a couple months. To put that in context, since its NASDAQ debut in May, Facebook has lost value nearly equal to Yahoo, AOL, Zynga, Yelp, Pandora, OpenTable, Groupon, LinkedIn, and Angie's List combined, plus that of the bulk of the publicly traded newspaper industry.
As shocking as this utter failure may be to the nearly 1 billion faithful Facebook users around the world, it's no surprise to anyone who read the initial public offering prospectus. Worse still, all the red flags that were flying when the company debuted--overpriced shares, shoddy corporate governance, huge challenges to the core business, and a damaged brand--remain at full mast today. Facebook looks like a prime example of what Wall Street calls a falling knife--that is, one that can cost investors their fingers if they try to catch it.
Start with the valuation. To justify a stock price close to the lower end of the projected range in the IPO, say $28 a share, Facebook's future growth would have needed to match that of Google seven years earlier, according to an analysis by Reuters Breakingviews and Anant Sundaram, a professor at Dartmouth's Tuck School of Business. That would have required increasing revenue by some 80 percent annually and maintaining high profit margins all the while. …