Recently, there's been a media frenzy calling for Mark Zuckerberg, founder and CEO of Facebook (Nasdaq: FB ) , to step down due to concerns related to the companies failing stock price. Wait, what? Shareholders are calling for the head of a CEO because the company’s stock is cratering. That’s never happened before! Well, let’s be honest -- it happens all the time -- but not when the company has only been publicly traded for a matter of months.
If Facebook was a mature, seasoned company like, say RIMM or Yahoo, and the stock price began to slide downhill, it would be understandable to say that Zuckerberg’s job might be in jeopardy. But, even though the company technically is experiencing a 'slowdown' in growth, when Facebook reported second quarter earnings a little less than a month ago, it posted some positive news: a 32% increase in revenue over the same period as last year, an increase in monthly active users by 29% year over year, and an increase in daily active users by 32% during the same time period. The company is growing at a very healthy clip, and shows signs of continuing revenue growth at this level.
RIMM’s biggest problem was that it never adjusted to its environment after the iPhone was introduced. At Facebook, a major concern from the bears is that, until just recently, mobile advertising was non-existent. But, mobile users just increased 67% year over year, now totaling 543 million. Mobile advertising is going to represent a huge part of the business down the road and, as fellow fool Rick Munarriz explains, sponsored stories are the game changer that should quiet the bears. Not to mention add a whole new revenue stream which didn’t even exist a year ago.
Other Social Companies
Other social networking companies that have recently come public, like Groupon (Nasdaq: GRPN ) or Zynga (Nasdaq: ZNGA ) , which have seen their stock prices fall 83% and 72% respectively, haven’t had their CEOs on the chopping block. Even worse, it has been reported that Mark Pincus, Zynga’s CEO, sold 18% of his shares when the stock price was nearly at its highest. Maybe Pincus should be picking stocks instead of making games?
But Pincus and Zuckerberg are alike in that both hold the largest amount of voting shares in their respective companies. While Zynga’s CEO doesn’t control more than 50% of the voting power, he does hold 35.9%. While it would be difficult to boot Pincus, it could be done without his consent. On the other hand, Zuckerberg holds 57% of the voting power because of the dual-class stock structure. Even though shareholders can complain and blame, they really can’t do anything about removing Mark from CEO.
Think long term
At the end of the day, investors are upset because they feel that they overpaid for Facebook. They have witnessed their portfolios decline while the stock has lost nearly 50% of its value since its IPO. The fact remains that Facebook was overhyped and overpriced at its $38 IPO price. But anyone who has performed a little due diligence leading up to the IPO figured this out. Now, some investors and institutions were forced to buy more shares than they initially wanted, due to a number of problems on that Friday morning, but whether investors were stuck with more or less shares than they wanted, they initiated the buy order first.
Whether you got stuck with more than you wanted or less, in the long run, it might be a good thing investors 'overpaid.' Facebook made a great deal of money when it IPO'd, and the last time I checked, that’s the purpose of selling shares -- to make as much money as possible. Whether shares are initially being offered to the public, being sold to a venture capitalist, or trading hands on the secondary market, stock is bought and sold to make money. And everyone, including companies, want to maximize their returns. Facebook used its popularity to extract the full amount of money for each share it sold. Based on today’s $20 price, it brought in a little more than double what it should have. In my humble opinion, I think this shows they did a really good job.
Since Facebook has a ton of cash, still growing revenue, and active users at a 30% growth rate, a new mobile revenue stream, and a 28-year old CEO for the foreseeable future, investors should not be concerned with the currently depressed stock price. You bought the stock because you ‘liked’ the company and its founder/CEO at a time when the company was showing insane growth rates. Now that growth is taking a breather, hold tight, and don’t sell out before giving the company a reasonable amount of time to prove the bears wrong.