Facebook's fall from IPO price casts doubt as to direction

With shares worth just half their flotation level, are Zuckerberg’s youth and drive sufficient to make a Silicon Valley success satisfy Wall Street expectations?

INSIDE FACEBOOK’s headquarters, a red-and-white poster asks bluntly: “What Could Go Wrong?” Below, in black ink, someone has scrawled in tiny letters: “Everything.”

The poster, one of several displayed across this sprawling campus, is part of the company’s risk-taking start-up culture, as is the fact that management has not pulled down the defaced copy. But as the company loses its lustre on Wall Street, this exchange on the wall points to the improbable turn that Facebook’s fairy tale has taken.

Once hailed as the most valuable technology company to hit Wall Street, Facebook is now worth just over half of what it was three months ago, with shares closing at $20.01 on Monday. Wall Street analysts are openly wondering whether chief executive Mark Zuckerberg has the business skills to deliver.

Facebook’s troubles began in earnest with an exceptionally ambitious initial public offering. Even the grown-ups that Zuckerberg (28) chose to run the business side of the company – Sheryl Sandberg, the chief operations officer; and David Ebersman, the chief financial officer – seem not to have been skilled enough to stave off that disaster. Nor were the bankers who handled the deal, including Goldman Sachs and Morgan Stanley.

“The company is suffering from a classic disease – it went public at too high a value,” said Dan Alpert, a partner with Westwood Capital, an investment bank that did not participate in the Facebook offering. The challenge for Facebook executives, Alpert said, is to persuade the market that it is not a fad and that its managers have a blueprint for making money.

In what passes for good news for Facebook these days, Morningstar, the investment research firm, said shares were almost cheap enough to consider buying, but warned that the price had not yet hit bottom.

That twist of fate, in many ways, reflects the tension between two moneymaking cultures in America: Silicon Valley and Wall Street. They are as symbiotic as they are dismissive of each other. They are equally focused on making money, but their approaches are different.

Wall Street wants to see swift growth in revenue, given Facebook’s still high valuation of about $50 billion. Facebook executives counsel patience. They say they are building tools that will forever change the world – but have yet to reveal any details about how they plan to quickly increase profits.

“The important thing for us is to stay focused on the fact that we’re the same company now as we were before,” Ebersman said in the company’s maiden earnings call in late July. Immediately after, the stock plummeted. Since then, Ebersman has met bankers on both coasts with that message.

“They think everything is going to be fine, and that everyone needs to understand Facebook better,” said one analyst who heard him speak.

The company is trying to show investors it is aggressively expanding the business, investing in expensive engineers and data centres. Certainly the public offering has stuffed the coffers with plenty of cash.

Facebook also wants it to be known that not everyone is running away from the stock. Reed Hastings, a Facebook director and chief executive of Netflix, recently bought $1 million in shares. But that was a drop in the bucket compared with the $9 billion in shares sold by insiders at the peak public offering price.