Facebook Inc. (FB:US) shares fell for a fourth straight day amid concern that the world’s largest social-networking service will struggle to wring profit from its 901 million users.
Scott Kessler, Internet equity analyst at S&P Capital IQ, cut per-share earnings projections for Facebook through 2014 and lowered his price target to $27 from $30 today. Separately, General Motors Co. (GM:US) Chief Marketing Officer Joel Ewanick said the carmaker’s consumer research indicates Facebook ads are distracting, after the company said it was dropping advertising on the social network earlier this month.
Facebook’s gains in advertising, which drives a majority of its revenue, aren’t keeping pace with growth in its user base as more members access the site through handheld devices. The company only recently rolled out an advertising service for mobile users, and the platform hasn’t yet generated meaningful revenue, Facebook said earlier this month (FB:US).
“It is unclear how inclined and able the company is going to be in terms of monetizing its substantial user base and related data and information,” Kessler said in an interview today. “They’re going to have growth, but people wonder about the sustainability of the growth, the quality of the growth and ultimately the profitability of the growth over a longer period of time.”
Citing mobile as a concern, Kessler lowered his earnings estimates for this year to 39 cents a share from 40 cents. For 2014, he reduced his projection to 83 cents from 92 cents, according to the report.
Facebook, based in Menlo Park, California, dropped 1.5 percent to $27.78 at 2:34 p.m. in New York. With the decline today, the stock is now trading below the low end of its initial proposed price range of $28 to $35 for its IPO. The range was later raised to $34 to $38.
Through yesterday, the stock had declined 26 percent since it began trading at $38 on May 18.
At an event today at GM’s Detroit headquarters, Ewanick said Facebook ads are an intrusion for users while they’re trying to connect and communicate with others.
Advertising on Facebook is “like you’re having a night out with your family and somebody comes up to you and says, ‘Hey excuse me, I’ve got this car out here I want you to buy,”’ Ewanick said. “Your first reaction is ‘What are you doing here? I’m having a conversation.”’
Still, Facebook’s stock was upgraded to hold from sell today by Brian Wieser, an analyst at Pivotal Research Group in New York. In a report, Wieser said the stock’s decline indicates risks for the company are “increasingly incorporated” into the price. He maintained a $30 price target.
“Short-term we are still cautious but there should be reasons” for optimism later this year and next, Wieser said in the note today.
He said some investors may still not fully appreciate all the risks associated with the stock, including capital expenditures, likely acquisitions and rising operating expenses. The expiration of a share lock-up, potentially introducing 1.8 billion shares into the market this year, is another risk, he wrote.
At the time of its IPO, underwriters led by Morgan Stanley (MS:US) set a price that valued Facebook at 107 times reported earnings in the past 12 months, more than every S&P 500 stock except two. Facebook and Morgan Stanley have faced criticism for increasing the number of shares to be sold in the IPO by 25 percent to 421.2 million days before the offering and pushing up the asking price.
Facebook increased less than 1 percent to $38.23 on May 18 in a day marred by delays, cancellations and mishandled orders. Robert Greifeld, the chief executive officer of New York-based Nasdaq OMX Group Inc., said a “poor design” in software driving IPO auctions caused the mishaps.
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