WHY IS FACEBOOK’S STOCK TANKING?

Sarah,

Facebook’s stock is in free fall.  Here are some reasons why:

1.  Valuation:

When a company offers its stock to the public, they must place a value on the company.  This value will determine the price of the stock that is offered.  When Facebook initially offered its stock for $38 per share, this meant that they valued the company at $104 billion.

Now that Facebook’s stock is down to $19 a share, the company is valued at $52 billion.  Clearly Facebook hasn’t lost half its value in the last couple months.  Rather, this is a sign that the companies that prepared Facebook’s initial public offering overvalued the company.

2.  Advertising:

Facebook’s primary source of revenue is advertising sales. (people pay for ads alongside people’s profiles)  The effectiveness of online advertising is still in dispute.  Further, more and more people are viewing Facebook from their mobile phones.  Facebook is having trouble monetizing activity on these smaller platforms because it is harder to advertise on the small screen.

3. Lock-up Agreements:

Some of the early investors of Facebook agreed to not sell their stock until a certain date.  The strategy is meant to protect the stock against insider trading.  However, in the last week, a number of these lock-up agreements expired and the investors immediately dumped their stock.  This sent the price even lower.

Bottom line: Facebook’s stock has been a disaster.  In the coming weeks, even more lock-up agreements will expire and the stock may go even lower.