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Facebook Inc (FB): 4 Reasons The Stock Could Plummet

social media etfDiane Alter: Facebook Inc (NASDAQ:FB) stock rose nearly 3% Tuesday to come within $11 of its IPO price – but a disappointing earnings report could send shares plunging if the social media giant doesn’t show healthy improvement.

One of the biggest things to watch when Facebook Inc. (NASDAQ:FB) reports Q1 earnings after the close Wednesday will be how the company is managing the transition to mobile.

Fourth-quarter results showed improved mobile ad revenue and mobile user numbers from the previous quarter. While the trend is expected to continue, the social network behemoth will need to impress Wall Street if it wants investors to stick around.


Shares have stalled since hitting $33 in January, the highest price since the stock peaked shortly after the IPO. Year-to-date, shares are down roughly 20%, well below the 11% gain for the broad based Standard & Poor’s 500 Index.

That kind of uninspiring showing amid record stock market rallies have left scores of investors with at least one foot out the door.

Investors are paying roughly $27 a share for a company that earned a paltry 2 cents a share over the last 12 months. That works out to a whopping price/earnings ratio of nearly 1,300.

Expectations for the Q1 earnings report are for a profit of 12 cents per share and revenue growth of 36% to $1.44 billion.

Even if Facebook posts better-than-expected results, the fate of Facebook stock is still fragile. Here’s why.

Four Reasons Facebook Stock Could Plummet

  • Mobile Ads Not Meaningful Enough

Mobile ads are key to Facebook’s future growth. Early investors will recall concerns over mobile growth were responsible for the 40% price plunge FB shares experienced shortly after its debut.

Indeed, users who access the social network from smarthphones and tablets tend to be more active than those who log on from desktop devices. But, mobile ads generate much lower ad rates than those from PCs.

Fourth-quarter revenue from mobile ads accounted for 23% of Facebook’s revenue, up from zero six months earlier, eMarketer reports.  Facebook’s mobile ad market is expected to grow 19% this year to $11.4 billion. Between 2013 and 2016, according to Gartner, mobile advertising will increase at a 29% annual rate to $24.6 billion.

In spite of that high growth rate, the mobile ad market is too small to have a meaningful impact on Facebook’s $5.1 billion top line, Forbes notes.

Furthermore, Facebook’s ambitious attempts to pry ad dollars away from Google Inc. (NASDAQ:GOOG) with the new HTC phone will be a struggle. The Internet giant is expected to take a hefty 53% of the mobile ad market this year, dwarfing Facebook’s projected 13% share.

  • Fleeing Facebook Users

Since amassing one billion plus users, chatter has swirled that Facebook members are spending less time on the site and leaving in droves.

Fickle teens have been defecting for rivals like Tumblr, Reddit, Whatsapp and Kik, taking with them crucial ad dollars. Huffington Post reports some six million U.S. members have fled since the billion user milestone was achieved.

As Facebook has “grown boring” and lost its “cool factor,” those who have left are not likely to come back. A recent Piper Jaffray survey shows just 33% of teens presently consider Facebook “the most important social network,” down from 42% from 2012.

  • Higher Costs, Slower Growth

Facebook operating expenses are expected to spike in 2013. Additionally, 2014 EPS growth is expected to slow significantly to 27.6%.

Any earnings outlook that shows higher expenses amid lower earnings will give investors few reasons to stick around – especially with shares priced high.

Still down about 29% from when it began trading as a public company nearly a year ago, FB shares are no bargain.  Forbes crunched the numbers and found the stock is still 76% overvalued.

  • The Board Room Shuffle

As COO Sheryl Sandberg promotes her controversial best seller “Lean In,” investors are left questioning just how time consuming her job at Facebook is, how much time she is putting in and her lofty compensation.

Last year, Sandberg was the highest paid Facebook executive pocketing $26.2 million in cash and stock.

What’s more, venture capitalist Jim Breyer announced last week he is stepping down from Facebook’s board. Breyer joined the board in 2005, the year he and his Accel Partners invested $12.7 million in the then-promising company. Breyer says he is stepping down to focus on his role at Harvard Corp., one of the governing bodies of Harvard University. His departure leaves a notable hole.

Watch for Facebook stock to react to Wednesday’s earnings report after hours.

Related: Global X Social Media ETF (NASDAQ:FB).

Money MorningWritten By Diane Alter From Money Morning

We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in theglobal economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.


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  1. Iko
    May 3rd, 2013 at 08:48 | #1

    thats funny. who wrote this? I’m 50 and I go on FB at least 4 times a day. it is the only site I go to every day! I closed all other accounts like TW and LI. all my family anfd friends are on it…

  2. Rob
    May 2nd, 2013 at 08:43 | #2

    @No

    Kids might not buy things, but they most certainly have a huge influence on what is purchased. If you’re buying as an investor you might be wiser not to ignore factors such as the P/E ratio.
    Personally a company which supports 1bn active users (approx) at quoted costs of approx $1bn dollars that only manages to return $5bn in sales, or $5 per user isn’t really an appealing investment, but each to their own…

  3. Srinath
    May 1st, 2013 at 16:05 | #3

    I hope the author of this article wont lose his job after 5PM today.
    I have bought heavy 28 calls….trying to be rich today. I hope the author did not buy an puts. Anyways…finger crossed.

  4. Mike
    May 1st, 2013 at 15:29 | #4

    @Bubba
    Hey NO, Bubba says you gonna lose all yo cash, run from that stock right now!

  5. Bubba
    May 1st, 2013 at 14:48 | #5

    @No
    Keep dreaming. Whatever you have invested in FB will be flushed in a few days. Sorry about your luck.

  6. No
    May 1st, 2013 at 14:09 | #6

    I like how it talks about the 1300 P/E ratio. Yeah, they only made 2 cents last year but they are projected to make 10 times that much this year… Also, people can talk all they want. However, I do not personally know of anyone that is leaving FB. Also, I could care less if kids aren’t on FB. Not like they are on the internet to buy stuff like the parents are…

  7. Mike
    May 1st, 2013 at 13:36 | #7

    All of this is very doubtful, very.

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