Facebook Stock Drop Marks Biggest One-Day Loss on Record - Sheds $34B Since IPO

By Alexandra Burlacu | Jul 29, 2012 12:14 PM EDT

Previous image Enlarge Close Next image

Share This Story

Facebook Inc. has shed about $34 billion in market value since its initial public offering (IPO) in May, as the world's largest social networking company fails to ease concerns about how it can draw more money from nearly one billion users.

Facebook's stock dropped 12 percent on Friday, July 27, marking its biggest one-day loss on record, after it reported its first quarterly earnings results as a public company. "That brought the plunge to 38 percent since the May 17 debut, which at $16 billion was the largest ever for a technology company," noted Bloomberg BusinessWeek. Moreover, the Bloomberg Billionaires index shows Facebook CEO Mark Zuckerberg's fortune dropped Friday from $13.7 billion to $12.1 billion.

Data compiled by Bloomberg also show that no other company among the largest IPOs on record has lost so much value so quickly. The $34 million plunge, based on a share count of 2.4 billion, is more than many companies' total market value, including Time Warner Cable Inc. and Whole Foods Market Inc.

Even with such a dramatic stock decline, however, Facebook is still more than twice as expensive as Google and most of the Nasdaq Internet index, based on price-to-earnings ratio. It remains more expensive than Yahoo, Netflix, online travel company Priceline.com, and roughly 10 percent of the entire Standard & Poor's 500 index. The company is nonetheless struggling with investor concerns over sluggish sales and user growth, as well as whether new revenue sources such as mobile could boost results quickly.

Facebook's debut as a public company was stained by technical glitches, and the stock eventually closed above $38 only on the first day of trading. The company had initially sought a price range of $28 to $35, then raised it to $34 to $38 just days before the IPO.

The company reported year-on-year advertising growth slowed to 28 percent in the second quarter, compared to 37 percent in the first quarter. Meanwhile, the number of daily active users climbed 4.9 percent from the first quarter, down from a 8.9 percent growth in the previous period.

According to data compiled by Bloomberg, sales in the second quarter rose 32 percent to $1.18 billion, exceeding the average estimate of $1.16 billion. Monthly active users also increased to 955 million, topping the 950.1 million analysts surveyed by Bloomberg had predicted.

The revenue rise, however, was shadowed by an increase in spending on marketing and sales, which surged to $392 million. Facebook also reported a net loss of $157 million, or 8 cents per share, and profit excluding certain costs of 12 cents per share. The operating margin excluding certain costs for the second quarter was 43 percent, down from 53 percent the previous year. Moreover, CFO David Ebersman said on the conference call that Facebook's operating expenses are expected to increase "significantly" in the second half of the year.

The highly anticipated earnings report and call marked the management's first chance since May to make a case about its growth prospects to Wall Street. "A little bit of earnings guidance, a little bit of optimism about future performance would have been nice," said Stifel Nicolaus & Co. analyst Jordan Rohan, who has a hold rating on Facebook, as cited by Bloomberg. "Facebook trades at a premium to many companies, including Google, and is only growing at a slightly faster pace than companies like Google."

Facebook generates most of its revenue from ads that reach users as they post videos, comments, or check photos uploaded to the site by friends. "Ad impressions continued the recent trend of growing more slowly than users as more of our usage is on mobile devices," said Eberman. "This trend is particularly true in markets such as the U.S., where smartphone use is expanding rapidly." The company also earns some money when users purchase digital items, including items on games made by Zynga Inc.

According to data compiled by Bloomberg, Facebook's price-to-earnings ratio is 51.5, compared to Google's 18.7. "We believe that Facebook is a good company, under good management with solid growth prospects as it continues to gain share of online and offline advertising," Capstone analyst Rory Mmaher wrote in a note, as cited by Bloomberg. "However, we believe the current valuation assumes the company will grow several new, large businesses over the long-term and we have o indication that this is feasible."