May 18 was not a good day for Facebook or those involved in its IPO. First, the Nasdaq had problems getting the first trade in to the market. Then, by the end of the day, Facebook had closed at $38.23, only 23 cents above its IPO price. Making matters worse, insiders noted that underwriters had to step in and become buyers to keep Facebook from dipping below its original IPO price. Since May 18, Facebook hasn't found much life. It recently closed at around $28, representing an almost 25% decline from its IPO price. It took until the week of June 15, a month after Facebook's IPO, for the stock to have a week where gains outpaced losses.

Value investors are always looking for stocks that the investing public has cast aside. Many of these investors are now asking if Facebook is a beaten down stock but a strong company that will soon bounce back from its disappointing infancy as a publically traded company.

SEE: 6 Career-Killing Facebook Mistakes

Analysts Weigh In
June 27 marked the end of the 40-day quiet period allowing analysts to finally give a public thumbs up or down on the stock. Many of these analysts came from banks that served as underwriters for the IPO and the analysts' opinions were mostly tepid. A mix of "buy" and "neutral" ratings dominated their opinions.

Morgan Stanley, the lead underwriter, put a $38 price target on Facebook over the next 12 months, providing those who bought at the IPO price little hope for profits over the next year. Goldman Sachs gave Facebook a "buy" rating saying that the stock will rise 10 points to $42 per share over the next year, but Goldman Sachs is a part owner of Facebook making investors question its motives for such a lofty price target.

Multiple banks see Facebook reaching $35 per share in the next year, representing only an 8% gain in the price of the stock; this makes other companies, some of which pay dividends, better choicese for investors.

SEE: Stock Ratings: The Good, The Bad And The Ugly

Advertising Trouble
Facebook's revenue comes primarily from advertising, but the company has been unable to find a strategy that monetizes its huge user base, which is forecast to surpass one billion this year. Many studies have found that Facebook ads aren't profitable for those that purchase advertising space. In a filing before its IPO, Facebook said that the growth of its mobile site was growing faster than its ability to monetize the users. Add to this the large amount of innovations that have resulted in a less than positive user response, privacy concerns and lawsuits, and Facebook continues to struggle with how to make hundreds of millions of users into a profit machine.

The Bright Side
Not all of this is Facebook's fault. As one analyst said, the mobile ad market is in its infancy and nobody - including Twitter or other mobile-based ventures - has found the winning formula for monetizing large user bases; however, if any company has the resources to figure it out, it's Facebook.

For many, Facebook is part of their daily lives. Not only is it a place to "like" and "share," an increasing number of websites use Facebook technology to authenticate users and build traffic through the sharing of comments. Users listen to music, play games and keep up on world events. All of this makes Facebook a utility as much as a place to share ideas.

SEE: Why Social Media Isn't Like The Dotcom Boom

The Bottom Line
Investors want to know if Facebook is a value stock and they aren't getting a lot of help from the analyst community. Facebook has been around for a while, but the ability of the company to turn its massive user base into profits is the key to seeing its stock become attractive to investors. So far Facebook hasn't done that and while many believe it will eventually get there, investors may not be willing to wait.

Related Articles
  1. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  2. Active Trading Fundamentals

    The Companies of Peter Theil's Founders Fund

    Learn about the major public companies that Peter Thiel has invested in and companies that are on the verge of going public at multibillion-dollar valuations.
  3. Forex Education

    China's Devaluation of the Yuan

    Just over one week ago the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the yuan, knocking over 3% off its value.
  4. Investing Basics

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $1,000 during Amazon's IPO, including how the power of the stock split affects investment growth.
  5. Stock Analysis

    6 Things to Know About Soul Cycle Stock

    Learn about SoulCycle and how it has found success. Understand six aspects of the company everyone should know before considering an investment in SoulCycle.
  6. Stock Analysis

    5 Things to Know About Neiman Marcus Stock

    Learn about Nieman Marcus and how it has become successful. Understand five aspects potential investors should know about the company.
  7. Stock Analysis

    5 Things to Know About Planet Fitness Stock

    Learn about Planet Fitness and how it has achieved success. Understand five aspects of the company that have made it an attractive investment.
  8. Stock Analysis

    Is the Apple Watch a Real Threat to Fitbit?

    Examine the potential for marketplace competition between Fitbit and the Apple Watch in the rapidly growing consumer wearables industry.
  9. Professionals

    10 Must-Follow Broker-Dealers on Social Media

    Stay in the financial markets 'know' by following these influential independent broker-dealers on social media.
  10. Investing

    Dick Costolo Biography

    Dick Costolo is a very polarizing man – half the world credits him with saving Twitter Inc. (TWTR) from its own popularity and making initial investors rich while the other half blames him for ...
RELATED TERMS
  1. Venture Capitalist

    An investor who either provides capital to startup ventures or ...
  2. Dog And Pony Show

    A colloquial term that generally refers to a presentation or ...
  3. Red Herring

    A preliminary prospectus filed by a company with the Securities ...
  4. Muppet Bait

    Naive investors who are lured into buying hot stocks or securities ...
  5. At A Discount

    This specifically refers to stock that is sold for less than ...
  6. Crowdfunding

    The use of small amounts of capital from a large number of individuals ...
RELATED FAQS
  1. What kind of assets can be traded on a secondary market?

    Virtually all types of financial assets and investing instruments are traded on secondary markets, including stocks, bonds, ... Read Full Answer >>
  2. Why would a company decide to utilize H-shares over A-shares in its IPO?

    A company would decide to utilize H shares over A shares in its initial public offering (IPO) if that company believes it ... Read Full Answer >>
  3. How do I place a buy limit order if I want to buy a stock during an initial public ...

    During an initial public offering, or IPO, a trader may place a buy limit order by choosing "Buy" and "Limit" in the order ... Read Full Answer >>
  4. How do corporate actions affect floating stock?

    Corporate actions, defined as a company's actions that affect the amount of outstanding company stock shares, can either ... Read Full Answer >>
  5. What are the advantages and disadvantages of listing on the Nasdaq versus other stock ...

    The primary advantages for a company of listing on the Nasdaq exchange are lower listing fees and lower minimum requirements ... Read Full Answer >>
  6. What securities does the primary market deal with?

    The primary market deals with all newly issued securities. When businesses, governments or other groups want to raise capital ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!