Flashback to 2001: How Far Can Facebook Shares Fall Before They Can't Fall Any Lower?

Facebook's stock performance since IPO

I?m having a flashback, and it?s Mark Zuckerberg?s fault. OK, not exactly the fault of?Facebook?s cofounder and CEO, but his company?s stock.

The swoon in Facebook?s shares, culminating in a close today at less than half their IPO price, brought back memories of what feels like (but may or may not be) a similar situation I observed a decade or so ago in the wake of the dot-com bust. I was covering Amazon.com during its period of rapid expansion, when it was far from apparent to everyone that it would survive, let alone turn into a blockbuster business.

Amazon.com?s shares?which went public at $18, as it happens the price to which Facebook?s shares fell today?had dipped below $6 a share in late 2001. Amazon had huge costs from building out massive warehouses around the country well ahead of its level of revenues, prompting one analyst to predict that Amazon would go under?unless it changed its expansionist ways.

It was the one time I remember wishing that I weren?t prohibited by BusinessWeek rules from buying stocks of companies I wrote about. Having reported on the company for several years and knowing how the economics of its business worked, I was pretty darn sure Amazon wasn?t going under and that founder and CEO Jeff Bezos knew exactly what he was doing.

July 10, 2000 cover story

And he did. Thanks to his vision coupled with a determination to stay the course while adjusting for market changes along the way, Amazon is now trading at $248 a share. A mere 100 shares bought then would have realized 40-fold return for a pre-commission, pretax profit of $24,200.

I don?t yet have the same feeling about Facebook?s stock that I had about Amazon?s back then. At $18, Facebook?s market cap is still nearly $40 billion for a business that may do $5 billion in revenues this year. I have no idea whether Facebook?s a buy, hold or sell, and with the possible exception of some people at or associated with Facebook, maybe no one does.

Although I?m reporting on and writing about Facebook about as much as I did about Amazon, I still can?t tell you whether?Facebook executives and engineers have yet come up with the ad formats or alternative business models that would support an Amazon-like phoenix routine. For that matter, I don?t know for sure whether Facebook, which is after all a large and profitable company already, even needs to do anything but execute on current opportunities whose potential most people don?t yet understand.

Not to draw too close a parallel for two very different companies in very different businesses and times, but once again?we have an analyst who has doubts about Facebook?s future, if not its survival, this time suggesting Facebook is worth no more than $15 a share. What?s more, a prominent market researcher just whacked $1 billion off its estimate of Facebook?s revenues this year thanks to slowing growth. And a lot more shares of insiders will be eligible to be sold in coming months, potentially depressing the stock price further.

I know it?s logically meaningless to compare stock prices of two different companies without taking share count and many other factors into account. Nonetheless, round numbers hold a certain power. If Facebook falls to around $5 like Amazon did?and honestly, that still seems a stretch?I think some people will start having the same feeling I had in 2001. Then it will be up to Mark Zuckerberg to show he?s another Jeff Bezos or ? well, one of those fallen dot-com stars whose names none of us can remember.

Source: http://www.forbes.com/sites/roberthof/2012/08/31/flashback-to-2001-how-far-can-facebook-shares-fall-before-they-cant-fall-any-lower/

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