Facebook’s stock has been completely hammered in the last week, after it reported its earnings for Q2 2012. While Facebook’s stock dropped nearly 20% following the earnings of Zynga and itself, the carnage is far from over.
Its stock is currently trading just above $20, which implies a valuation of just around $45 billion, which is much lower than the much touted $100 billion valuation it was supposed to be worth.
Its stock price is now just slightly more than half its IPO price, which means that nearly all investors are in the red. After showing explosive revenue growth in the last couple of years, its numbers in the last two quarters have failed to impress. Its ad offerings have failed to generate any significant revenue so far, and the most recent dip in its share price was triggered by allegations by an advertiser that 80% of all clicks on Facebook ads came from bots. To add to that, came the revelation that around 8% to 9% of Facebook’s users are fake users (duplicate users, misclassified accounts and “undesirable” accounts).
Facebook’s problems are many:
1. It still hasn’t been able to find a way to effectively monetize its growing mobile audience.
2. Its growth in the US and Europe has peaked, and there is not much revenue upside potential left through new user growth in those markets.
3. In developing markets like India, where it is expected to grow the most, the average ad revenue generated per user is much lower than in the US, so it wouldn’t impact its revenue growth much.
Given how Google has been making tons of money from search advertising, Facebook could easily be worth much more if it’s able to prove that social advertising is just as, if not more, effective as search advertising.