Is Facebook still falling? Evan Wilson, Pacific Crest Securities analyst, and Michael Pachter, Wedbush Securities analyst, weigh in with the trade on the social networking company.
By Roland Jones, NBC News
With the share price value of some of the best-known social media stocks in the doldrums, investors in these companies have been asking themselves a question lately: Did we get fooled again?
During the so-called Internet bubble a decade ago, investors happily plowed money into scores of new Internet companies that had virtually no revenue growth, betting that technology would change the world and the new dot-coms would eventually turn a profit.
After the bubble burst some dot-com names, such as Amazon.com, did eventually recover and move higher, but in many cases investors were proved wrong and the companies they had invested in collapsed.
Some are now suggesting another dot-com bubble is brewing in the social media space. The most prominent example they point to is Facebook. After years of speculation that the social media giant would go public, it finally did so in May, and since then its stock price has fallen 53 percent and counting, washing away more than $50 billion in market value.
Facebook?s share price hit a new all-time low Tuesday, sinking below $18 for the first time, although it perked up in after-hours trading on news the company had taken steps to reassure investors and its own employees as its share price spirals downward.
In a regulatory filing the social network said its Chief Executive Mark Zuckerberg won?t sell stock in the company for one year, and promised not to sell stock to cover a nearly $2 billion tax bill. The social network will also move to effectively buy back millions of shares this fall, which will likely bolster its flagging share price, and allow employees to cash in their stock weeks ahead of schedule.
Facebook?s losses since its IPO aren?t quite as dramatic as those of other social media companies that went public over the past year, including online gaming site Zynga, which has seen its stock price decline 71 percent since its IPO last December, and Groupon, which has seen its share value plunge 84 percent since the company went public last November.
The sharp declines have less to do with shaky business models and more to do with sky-high expectations for the companies in the emerging social media space, said Jay Ritter, a professor of finance at the University of Florida and an expert on IPOs.
?Facebook is making money; it has a successful business model. As a company it has continued to execute, although (its managers) have been having difficulty monetizing mobile users,? Ritter said. ?The problem has been for investors who bought in at a price that factored in extremely optimistic expectations (for the company).?
S&P Capital IQ equity analyst Scott Kessler is similarly sanguine. He recently upgraded his view on Facebook to a ?buy,? saying he thinks too much is being made of the potential threat to Facebook?s stock price as a result of the expiration of a so-called ?lockup? period for key investors in the company. The period has prevented some early investors -- usually venture capitalists -- and insiders from selling millions of shares they own in Facebook.
The company is more focused on the monetization of its mobile users now, and in that regard it?s executing ?better than expected,? he told CNBC Tuesday, adding that the stock price has fallen to a level that makes it more attractive.
?We see a pretty attractive valuation right now,? he said.
A more measured view of Internet companies is a good sign for the sector, analysts say. It suggests the technology sector has matured since the speculative days of the dot-com boom.
A bright spot in the social media space is LinkedIn, a social network for managing your professional identity and searching for a job. Its share price is currently up over 14 percent from its IPO in May 2011. LinkedIn has successfully exploited a niche in social media, Ritter said.
Online gaming site Zynga, by contrast, has struggled to convince investors that it can maintain growth, he added. And perhaps the biggest victim of overly-lofty expectations is daily deals website Groupon, which went public in November 2011 to great fanfare and at a valuation above $13 billion. It has since shed about three quarters of its market value on concerns about the growth of its daily deal business.
?Groupon has high customer acquisition costs, and that is one of the issues that continues to be a question mark over how good its business model can be,? Ritter said.
Picking winning stocks is, of course, a difficult job, even for professionals.
Ritter notes that 49 companies that went public between 2001 and 2010 saw their share prices fall by at least 50 percent from their offer prices to their sixth month anniversary.
They lost an average of 63.1 percent in their first six months as public companies, but during the next 18 months the 49 companies on average rebounded, with an average positive return of 22.5 percent during these 18 months.
Ritter adds that if an investor had purchased shares of technology heavyweights such as Microsoft and Oracle when they went public in the mid-1980s and had ?held on for the ride? the returns on the stock would have offset any losses.
Venture capitalists expect to lose money on most of the companies they invest in, but they count on what they call ?10-baggers? -- companies, such as Google, that return as much as 10 times their initial investment, Ritter said.
?If there were a simple rule it would be easy for mutual fund managers to beat the market consistently,? he said. ?And the evidence is they just can?t do it.?
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