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Could that 'Amazon magic' stop Facebook share slide to $10?

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By Noel Young, Correspondent

August 18, 2012 | 3 min read

Facebook shares sank to $19.05 on Friday, almost exactly half their IPO price of $38. Worse could be to come, as millions more shares come on the market between now and the end of the year. Could Facebook even go to $10?

Facebook: Magic needed

Yesterday the influential New York Time DealBook column asked if readers , "wanted to better understand the crazy world of technology stocks?" - and suggested that Facebook might need some “Amazon magic", an allusion to the fact that Amazon shares were buoyant despite disappointing earnings.

Looking at some companies that have gone public in recent months, DealBook said all needed "one main magical story".

For Groupon, it was that the company had found a revolutionary marketing tool that was perfect for small businesses. The untapped market was theoretically huge.

"The nightmare begins when investors stop believing in that central story," said DealBook. " Earnings don’t have to be terrible, and they haven’t been at Facebook, Groupon and Zynga, the hardest hit. They just have to contain a few clues that the dream won’t be achieved."

Groupon was down 75 percent from its initial public offering, with its shares trading at 13 times the earnings that analysts are projecting for 2013.

Facebook went public at a stock price that was 100 times its earnings per share. The belief was that Facebook could “entwine advertising into all interactions on its site to generate enormous revenue.”

DealBook explained, "Most efforts to value companies rely on guessing the worth of future profits."

In the case of Facebook ,"The faith level in the company is declining, but it may drop further".

Right now, the social network is trading at 32 times the earnings that analysts are expecting for 2013. This is far above Google’s 2013 price-to-earnings ratio of 14 times.

The math is simple : If Facebook traded at 14 times analysts’ 2013 earnings forecast, its shares would be just below $9.

Hope for Facebook may lie in the story of Amazon, said DealBook. Its shares trade at 100 times what analysts forecast 2013 earnings will be - despite disappointing earnings for several years.

"The dream is that Amazon.com is well on its way to dominating Internet commerce, and can look forward to prodigious profits once that happens, " says Dealbook.

Amazon "shows there’s a way to get investors believing again. Its shares plunged in the dot-com bust of the late-1990s, but in the last 10 years it has regained extraordinary status."

DealBook's last word , "Facebook needs some of that magic fast."

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