Friday, August 24, 2012

What Zuckerberg must do to right the Facebook ship

Investors are starting to panic. CEO Mark Zuckerberg needs to calm the masses while building revenue-generating products.
Zuckerberg's first three months as a public company CEO have been rocky.

CNET - All is not well at Facebook. Some have even started calling for CEO Mark Zuckerberg's head. But the panic is premature, and the social network has plenty of time and opportunity to turn things around.

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.