New York: The slide in Facebook Inc. stock that has cost investors $25 billion (Dh91.9 billion) may not end until the shares drop another 20 per cent, leaving the company's valuation on par with competitors that also do business over the internet.
Facebook, with a market capitalisation of $79.1 billion, is trading at 29.5 times the company's projected 2014 profit of $2.69 billion, data compiled by Bloomberg show. The stock would have to dive to $23.07 to match the average price-to-earnings ratio for the Nasdaq Internet Index based on estimated earnings in the next 12 months, according to the data.
Investors have pummelled shares of Facebook since its initial public offering (IPO), citing concern over growth prospects for the largest social-networking service. Shareholders filed lawsuits that said the company and its underwriters overpriced Facebook at $38 a share. The IPO gave Facebook a higher multiple than 99 per cent of the Standard Poor's 500 Index.
"It could fall quite significantly because it was priced at a significant premium," Sameet Sinha, an analyst at B. Riley & Co., said . "Such stocks — when they go out of favour — tend to fall before stabilising." Facebook slipped below $30 on Tuesday for the first time, falling to $28.84 and surpassing its previous low closing of $31, which was set on May 22.
Facebook, based in Menlo Park, California, may struggle to make money from a user base that's increasingly accessing the site via handheld devices.
The company said this month that advertising growth isn't keeping pace with gains in daily users, and in April reported first-quarter profit fell 12 per cent.
Based on a trailing earnings of $974 million, Face-book trades at a price-to-earnings multiple of 81 times. The Nasdaq Internet Index, whose members include Amazon.com Inc., Google Inc., EBay Inc. and Yahoo! Inc., has a ratio of 35.4 times profit in the past year and 23.5 times projected earnings.
Bullish investors are speculating that surging demand for social-media stock, coupled with earnings growth faster than analysts' estimates, will justify Facebook's valuation. "This a company that's growing and changing rapidly," Arvind Bhatia, a Dallas-based analyst at Sterne Agee & Leach Inc., said in an interview Tuesday. He has a buy rating on the stock and a one-year price estimate of $46. "Google looked expensive for a long, long time. That's what happens with companies that are changing and disrupting industries."
The pace of Google's yearly profit growth has averaged 73 per cent since its IPO in 2004. While the company's trailing 12-month multiple has slumped more than 70 per cent since its 2004 debut, shares of Google have surged 599 per cent from its IPO price through Tuesday.
