The most anticipated initial public offering in years has also turned out to be the most disastrous. Trouble began almost immediately for Facebook on May 18, when its first day of trading was delayed by half an hour due to technical glitches on the Nasdaq exchange. Problems continued throughout the day as the system was overloaded with requests. Some investors weren’t even sure if their orders had been executed. It later emerged that analysts at Facebook’s underwriters revised their growth targets to reflect weaker advertising revenue, but didn’t properly disclose the revisions to clients before the IPO. Dozens of lawsuits against Facebook, its underwriters and the Nasdaq ensued. It probably wasn’t the debut Facebook founder and CEO Mark Zuckerberg wanted.
But what’s worse than the immediate IPO fallout is Facebook’s current share price. As of the end of November, Facebook was trading at $27—since the IPO it has lost 28% of its value. The company isn’t alone. A general gloom descended over other social-media companies this year. Daily-deal pioneer Groupon and social-gaming firm Zynga, which both achieved big valuations based on little more than high expectations, are tanking. The problems facing each company are unique—Groupon is suffering from high marketing costs, while the popularity of Zynga’s games is waning—but it became painfully apparent this year that social-media hype isn’t selling like it once did.
To wit, revenue from Facebook’s payments operation (money earned when users purchase virtual goods for games) is under pressure. The payments operation totalled 14% of Facebook’s revenue in the third quarter. With more than half of that amount coming from Zynga, Facebook will feel the gaming company’s pain. JPMorgan Chase analyst Doug Anmuth estimates that Facebook’s payments revenue will fall 26% next year as Zynga struggles to produce another hit game on par with Farmville, a challenge made even more difficult by the number of developers and top executives fleeing the company.
The decline in payments only increases the pressure on Facebook to nail its mobile advertising strategy. More consumers are using smartphones instead of computers to access Facebook, and the company hasn’t figured out the best way to make money from mobile ads. The result has been a slowdown in the growth rate of advertising revenue: revenue expanded by 36% last quarter, compared with 69% in 2011.
New attempts to tap the mobile market are promising—mobile ad revenue was virtually zilch at the start of the year, but now Facebook is earning approximately US$3 million per day. But not everyone is convinced the company can keep boosting revenue so easily. Richard Greenfield, a technology analyst with BTIG LLC in New York, recently downgraded Facebook to Sell and slapped a $16 target price on the stock, less than half of Facebook’s IPO price. Greenfield noted there is a downside to increasing the number of mobile ads: they clutter users’ news feeds, and as a consequence, are more likely to irritate people. “Unfortunately, we believe that in these efforts, the user experience is falling behind and the company will ultimately suffer,” he wrote. Until Facebook and its ilk find a way to expand revenues without annoying users, the fervour around social-media companies is likely to stay as depressed as Facebook’s share price.