Has the next bubble already burst?

Since Facebook floated on 18th May, not much has gone right for the eight-year-old company. Trading began at $38 a share, and now their share price has tumbled 32 percent to $25.87. The first day of trading also saw glitches in NASDAQ’s system, which disrupted early trading in the stock, but this cannot be used as an excuse for the later falling price.

One winner from the flotation was the legal profession. There has been a flurry of legal action with Facebook, Mark Zuckerberg and the underwriters (led by Morgan Stanley) who supported the IPO all being sued by the new, and increasingly disgruntled, shareholders. The investors’ anger stems from the last minute decision to increase the number of shares being sold by 25 percent to 421.2 million, in addition to increasing the share price, which looks greedier by the day, or at least ill-judged. The main reason for the fall in Facebook’s share price stems from news, leaked to some of the larger investors before going public, of smaller future revenue streams from their major source of revenue: advertising. Their problems revolve around converting ads we all see on computers to mobile devices like our Blackberrys and iPhones.

As an increasing number of phones can access Facebook, making sure that they can profit from this development seems crucial for their continued profitability, particularly given shrinking revenues per user. Facebook has recognised this, and it looks like they may be getting desperate. Their latest move seeks to widen the potential user base to under 13’s by including parental supervision settings. This has, of course, come under severe scrutiny, not least from Doug Fodeman of childrenonline.org, a pressure group, who called such a move “[like] giving the keys to the chicken coop to the fox.”

These disastrous opening weeks as a publicly traded company may have wider implications for Zuckerberg’s brain-child. With increasing scrutiny being placed over its potential profitability, we can expect the share price to remain below $28 for some time. The reason for this is that the profits from this industry still remain so uncertain. The way people interact with Facebook is constantly evolving, and there are difficulties in ensuring that adverts reach those that they are intended for with the increased use of ad-blocking services. Whilst one in five users currently purchase from a company through a Facebook ad, it would not be a surprise if this declines over time. This fact has not gone unnoticed, and if we look elsewhere across the industry we see similar patterns emerging.

Three of the biggest flotations in recent years, Pandora, Groupon and Zynga, have all seen their share price tumble, to lows of around 50 percent of their original price in some cases. More interesting still is the effect that the Facebook flotation has had on these share prices. Zynga, a social-gaming company operating through Facebook, saw their share price tumble 13 percent on the day of Facebook’s IPO, yet another sign that many of these companies may well be overvalued.

What the future holds for Facebook is still anybody’s guess, but this is precisely the problem. It is currently worth more than the leading advertising firms in the world, with future revenues much more uncertain: it doesn’t quite add up. Certainly not to $104bn, as most investors are beginning to realise. Zuckerberg himself can also be questioned. He seemed to lack any of the calming influence expected of the CEO of one of the largest companies in the world. However, by raising $16bn in the IPO, he has perhaps pulled off a masterstroke.