Facebook's stock price has traveled south since its flashy (and disastrous) debut in May. Facebook closed at $19.44 per share on Wednesday, barely half of its $38 IPO price.
Why is Facebook's share price dropping like a boulder off a cliff? M&A specialist Marty Wolf provides an excellent explanation, but I'll summarize the key points:
- Facebook's price-to-earnings ratio (P/E) for the last 12 months was 72.4, which puts it way above the P/E ratios of Google (20.0), Apple (15.7) and Yahoo (17.0). This would be fine if Facebook's revenue growth were accelerating, but it isn't.
- Facebook currently makes approximately $5.12 per user on an annualized basis (calculated from its most recent quarterly figure of $1.28 per user). It would need to boost that more than sixfold, to just over $33 per user, with its current userbase (about 900 million users) to justify a $38 share price.