Beginning at $38 last month, Facebook (NASDAQ:FB) closed at $33.1 on Tuesday and is trading 3% lower at $32.08 on June 27, at last check. While Facebook’s Wall Street underwriters are maintaining an optimistic sunny-side-up face, and even slapping unlikely price targets of $42 (Goldman Sachs) and $45 (JPMorgan), more realistic viewpoints from the likes of Daniel Salmon from BMO Capital Research have a bearish outlook on FB. Their take – FB will be underperforming the market very badly and will have a price target of $25. Reasons – slowing user growth and dubious advertising tactics.
When a big company grows into giant proportions, people tend to overestimate its longevity – there is an awe factor that tends to make the general public think that it is indestructible. However, various dotcom bubbles tell a different story. Large dotcoms live and grow with public perception. If they show signs of weakness once, and fail to recapture people’s “awe” quickly, they can have a pretty drastic fall.
A $5 fall in just over a month may not seem like doomsday for Facebook. However, there is a general perception growing among people that the giant social networking site has failed majorly with its IPO. Worse, many of its recent practices are seen as dubious business practices. For example, its recent switching of user email addresses has been called into question by many. The reason behind the switch is a purely business decision on the part of Facebook. It is aimed at forcing people to use Facebook’s email system more, make people get connected only via Facebook – which ultimately helps Facebook display more paid, targeted ads. This is just what Google and everyone else does – however, Facebook’s way of doing it is rather crude, according to Forrester analyst Nate Elliott.
In another disturbing news, Facebook recently launched an app - “Find Friends Nearby” – that can tell an user if another user is near his or her location; opening up the potential for serendipitous stalking by online strangers. In yet another news, NASDAQ traded ZYNGA is quickly trying to distance itself from Facebook even while it positions itself as a major FB alternative.
Coming at a time when public perception of Facebook is showing signs of critical doubt, and almost 5% decline in US unique users according to a ComScore report, these news items are problematic for the company. Taken individually, they are nothing; but suppose you take it like this – here’s a company, born with a dubious past, much hyped before it launched its IPO, hype that was just that, a lot of hype with not much real substance; and then the company getting all these negative ratings from unaligned analysts like Salmon, and then the various reports of dubious business practices, and lastly, a company, or many other such companies, like Zynga, trying to create a Facebook alternative. How does that sound? Social networking is a very potent business, and if somehow Facebook creates a small vacuum which someone else can fill, there’s no saying where things will end up. Remember the hoary days of Myspace, when there was no one else around? Where are they now?
So, to sum up, not sure if FB is going to go under $5 next year, but not sure if its going to go up, either.
Note – This article was written for a customer who published it but didn’t get around to paying for it. This is a good, even great client, so the fact that we are publishing it here does not mean we do not appreciate them as a client. Its just that we liked this article a lot, and since it was not going to be paid for, we thought we were within our rights to publish it.