Facebook’s Mark Zuckerberg is trying to take the social networking site to a new level, following a blow in the firm’s stocks over the last two weeks.
Facebook’s stock crashed 40 percent down from its IPO of $38 and now stands at $22.86. Trying to generate revenue for the firm, Facebook initiated ads for mobile, which Mark hopes will be a boon for the sinking morale of investors and would also monetize its mobile traffic.
However, there are many analysts who believe that Facebook’s stock could go down to $15 or even less.
According to an article published in barrons.com, writer Andrew Barrey feels that Facebook’s business stays uncertain and it’s unlikely that the social networking site will hit off with focus on mobile ads.
Facebook is trying to monetize its services without compromising on the user experience. And as mobiles have a small screen, Facebook won’t get much chance to configure ads.
Currently, Facebook trades at price per earnings (PE) of 48 cents a share.
Facebook is valued at $61 billion, or $53 billion excluding estimated $8 billion in cash. The social networking site is clearly lagging far behind Google and Apple. According to Barron.com, Facebook’s shares do not make a good buy and stand at as little as $15. However, Wall Street’s consensus offer more optimistic estimate for Facebook, showing its earnings to rise 31%, to 63 cents a share in 2013.
Facebook has a slow growth rate. And problems in mobile advertising don’t seem to be going away anytime soon. So it’s doubtful that investors would want to put in money in the firm.
There’s another point discussed in the article. Facebook has also started to issue many restricted stock to its own employees, so that they stay within the firm. The social networking site had taken out $1.4 billion restricted shares last year, which accounted for around $500,000 per employee. Adding that to this year, the firm has issued $1 billion of its restricted stock.
These restricted stock units (RSUs) that employees have do not have stock options and could be out for sale anytime in the coming months.
As per Mark Zuckerberg, CEO, Facebook said that it’s the firm’s way to compensate.
However, people such as Mark Cuban, Investor, believe that Facebook pulled off its IPO at a high price of $38, to keep its revenue at the maximum, which did get it an impressive amount of $10 billion. He also stresses on the fact that the only ones who lost in the game were the shareholders who thought they could pass the stock on to someone who will pay more.
Further, Cuban added that Facebook could boost spirits among its employees by merely reissuing stock, which can give better benefit to its employees.
Let’s take a look at how RSUs work-
Suppose Facebook offers 1,000 shares to its employees that have a value of $30. Now in case the price falls to $10, they will get $10,000, instead of initial $30,000 offered. This means that the plunging stock will give employees less value in shares, and that Facebook will give them lot more, say around $10 to make them feel as valuable as they were before its stocks plummeted.
Something similar had happened with Google in 2009. The firm lost more than twice the market cap valuation as compared to Facebook now, when the search giant simply repriced its stock options.
The big variation between Facebook now and Google then lies in the RSUs.
Facebook can’t change the price of RSUs, as the one who holds RSUs is only bothered about the current stock price. Instead, Facebook would just have to take out more shares at the new price.
RSUs it appears also have a taxable value upon issue, while stock options do not.
During that time, Google also had political cover for its move, as it was seen as a measure to cure errors of its own doing. Also it wasn’t the only firm going through economic slowdown that time.
So in case Facebook follows suit Google, it would anger many investors, which could also create long lasting rage with a breach of trust that would hurt the stock holders even more.
William Hambrecht, another investment banker and IPO expert feels that Facebook would get lot of criticism and could also lose credibility in case it tries to restore the value of its employees’ shares.
Coming back to the $15 stock price, majority of Wall Street analysts are optimistic about Facebook’s stocks. Many investors are just waiting for the lock-up on insider shares to end, which will only tell what the market response would be.
By then, it will also become clear as to how the social networking site plays its hand at RSUs.