Facebook Inc. is the company that owns the largest social media network across the globe, facebook.com. Ever since it was introduced into the market, Facebook attracted an extensive number of potential investors who considered the firm to boost their investments after floatation of the shares. However, these anticipations from the investors were cut short with immediate effects after the Initial Public Offer. It was explained by the fact that shares embraced a downward trend on the first day of trading in the stock exchange market. Thus, major objective of this assignment is to examine the challenges attributed with investments in Facebook share capital.
Facebook is a multinational company established in 2003 by Mark Zuckerberg in conjunction with his friends. It is a social network-operating company situated in the United States of America. It is operated under the dubbed investment plan. Facebook Inc. acquired the domain, fb.com from the American farm bureau.
Before 2102, Facebook was a private company which operated under an investment plan of about $ 8.5 million. However, with time, the company embarked on raising capital through public offer. The Initial Public Offer took course in May 2012 and is established as one of the vastest IPO in the history of stock investment. The floats were approximated at about $ 5 billion (Key 2012).
At the first day of share trading, Facebook’s shares hit 460 million shares mark at the NASDAQ stock market. However, this growth in the number of shares was faced with a technical hitch which resulted into a downward trend in the share prices from an initial offer of $38 to about $31 within the first day of share placement. By June, Facebook shares had embraced a downward trend as the Company had already lost 43% of its shares’ value.
Perceived Challenges of Investing in Facebook before the IPO
First, it was natural to assume that the company’s top-executive was to continue holding office and by far, possess a larger extent of the control in the course of operating the firm’s activities. It is noted that even after placement of the IPO Mark Zuckerberg continued to hold about 57 % of the voting control power of Facebook. This is perceived to be a dictatorship form of management in the sense that the CEO could not be demoted even in the case that he did not perform to the shareholders’ expectations. This exposed the investors to risks of growth and development of the firm’s revenue (Poletti 2012).
Second, there was an indication that Facebook’s performance in terms of revenue had embraced a downward trend way before the Initial Public Offer. Despite the fact the company’s revenue growth had hit the $1 billion mark in its first quarter, the growth rate was perceived to be decelerating to 45% from 55% in the previous quarters (Poletti 2012). This downward trend was catapulted by a rather lower number of Facebook subscribers across the globe.
Third, there were inconsistent income patterns which were foretold to curb the growth and development of the company due to the fact that it could reach the level of share’s price volatility point. At this point, the prices of shares were redundant to growth given the fact that the company, at hand, is not posting reliable income which could be translated to dividends in that matter. It should be noted that investors are concerned with the financial performance of a company so that their resources are only placed with a company but also multiply in the end. In the case that the investors are not certain about this fact, the chances of investing the given company cease to be of interest (Poletti 2012).
Fourth, the idea of mobile products diversification was not embraced fairly within the company as it had done on personal computers. The move taken by the company to purchase the photo-sharing application program was a clear indication that matters pertaining to mobile growth and development was marred with extensive challenges and issues in that matter. The acquisition of the program was undertaken even after logistics of the company indicated that there were more than 488 million subscribers who used mobile phones, especially smart phones (Poletti 2012).
Fifth, even after its foundation, Facebook faced possible challenges in terms of competition from such smaller social networks as Pinterest and Tumbir. However, the company embarked on purchasing Instagram in order to cut down its competitors. The notion of purchasing the smaller company was out of the fact that it needed to dominate over the market yet overlooking the implications of the exercise altogether (Poletti 2012).
Facebook Current Position
According to Seeking Alpha (2012), Facebook generated altered earnings per share which was slightly fairer as compared to the previous quarter. However, the EPS was still considered to be flat with respect to the previous year. This is also attributed with the assumption that there has been a significant decline in the levels of the operating margins by 9%. In October, the company enjoyed a 19% gain in terms of share prices out of the assumption that more than 15% of its shares were held by short-term investors (Seeking Alpha, 2012).
In the course of third quarter in 2012, Facebook recorded a 32% growth rate in terms of revenue. However, when compared with 45% of the Q1 of 2011, these growth rate is considered to be at the lower side, thus depicting a downward trend of the overall operating income for the company altogether. This downward trend in the operating income of the company is a shocking revelation to both long and short-term investors with the company taking into account that the company had by far participated in a vast Initial Public Offer exercise after Google Inc. (Seeking Alpha 2012).
Another crucial aspect worth noting about the company’s operations is that the company’s compensation expenses grew by a substantial 9%, thus depicting a reported loss of about $59 million which was as a result of $ 222 million non-recurring income-tax-expense, a non-deduced stock related compensation expense. Statistically, number of monthly users of Facebook increased from 955 million to about 1.01 billion as of Q3 2012. Furthermore, there was increased number of Facebook users with mobile phones from a figure of about 60% to 61% in the subsequent year of 2012 (Seeking Alpha 2012).
Possible challenges could arise given the fact share prices for Facebook have decreased immensely to a lower position than was expected in the course of Initial Public Offer. Currently, the share price stands at $22 which came down from the initial IPO price of $38 in May 2012. This is a significant decline especially to investors who purchased large sums of shares (Poletti 2012).
Notably, the company’s price per share ratio has been lowered below the minimal value of 22.5 X. This ratio is still trading at 10.75 X (Poletti 2012).
According to Cohen (2012), Facebook share price target declined from $31 to $23 due to issues which were attributed to the menace of mobile monetization as a whole. Analysts’ views pertaining to Facebook shares are indicating a further decline due to slow growth in mobile monetization activity as a whole. Thus, the current challenges facing Facebook lies in the assumption that it is experiencing redundant growth in terms of its subscribers.
The low number of subscribers has hindered the sales revenue for the growth of the company, taking into account that Facebook makes money through posting and updates. Thus, potential investors should be alert on this downward trend due to the assumption that revenue determines dividends for a Company (Poletti 2012).
Given the fact that interests of both long-term and short-term investors of the company lie in the possibility of the company to transform sales into immense profits which is later used to pay for dividends, hence, Facebook share index does not depict this financial assumption. Thus, it is safe to assume that it is not safe to invest resources into the firm as a whole (Shinal 2012).
To sum up, it is fair to postulate that the IPO which had been conducted by the firm was considered to be a hitch and an unfortunate occurrence to potential investment. This is attributed to the technical hitch established on the first day of trading which lowered the prices of the shares significantly. Also, it is argued that the investment bank contracted by the company had contributed to the downfall of the share-price. The investment bank contracted by the firm was JP Morgan.