Facebook shares spook investors now. But long term?
Facebook shares reach lowest level ever as revenue growth slows and investors cash out. Analysts are more upbeat about the potential for Facebook shares.
Investors are dumping Facebook's stock, spooked by slowing revenue growth, the lack of a financial outlook and plans to spend more money in the coming months.Skip to next paragraph
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Are they right?
Only if they are thinking in the short term. Investors can expect Facebook's stock to be volatile for a few years. But analysts say those willing to wait will likely be rewarded — someday.
"I view it as a tomorrow stock," says Christian Bertelsen, chief investment officer at wealth management firm Global Financial Private Capital.
"The whole thing on Facebook is, look, if your time horizon is hourly, weekly or even monthly, this is not the stock for you," he adds. "You need to take a much longer-term view on it."
That's about three or four years, he says.
Founded in CEO Mark Zuckerberg's Harvard dorm room in 2004, Facebook was a product of the PC era. Now, in the age of mobile computing, a growing number of people are accessing Facebook through their iPhones, Android gadgets and tablet computers. Yet Facebook is only now starting to figure out how to make money from its mobile audience.
"The company is going through an almost painful transition from desktop to mobile," Baird analyst Colin Sebastian says.
He calls Facebook "a speculative investment," but one with plenty of potential.
"With almost one billion users, Facebook is amassing the most comprehensive user profile database in existence," Sebastian says. This, he adds, offers a "significant opportunity" to reap a big chunk of the global advertising market, which is currently at $500 billion a year.
"Amazon comes to mind immediately," Bertelsen says.
After that company went public in 1997, at the time mainly just an online bookstore, critics were quick to cry dot-com bust, call its business a broken, and so on. Today, it is the world's biggest online retailer, selling everything from DVDs to vacuum cleaners to Web storage.
"Now they are the retailer to the world," he adds.
Amazon.com Inc.'s stock price grew to more than $200 a share, from less than $2. Of course, Facebook has started out much higher, at $38.
Facebook's first earnings report since its rocky initial public offering on May 18 was the second coming that didn't quite materialize. So investors sent Facebook's stock to its lowest level ever on Friday. Shares fell $3.14, or nearly 12 percent, to close at $23.71 after hitting $22.28 in the morning. The previous low was $25.52, reached on June 6.
The stock dropped despite the fact that Facebook's second-quarter results met Wall Street's expectations, with revenue one-third higher than last year.
Given the rocky economy and investors' heightened sensitivity to a stock's value, betting on a company becomes a "show-me story" for many of them, Sebastian says. That means investors want proof rather thanFacebook's word that it can grow its revenue and make a profit.