Two years ago today, Facebook (NASDAQ:FB) began trading on the stock market under ticker symbol FB. With already nearly 1 billion monthly active users at the time, roughly one out of seven people on earth were familiar with the social network. The IPO was certainly one of the most closely watched in history.
After the IPO, concerns mounted. But to the world's dismay, CEO Mark Zuckerberg & Co. performed beyond the most bullish expectations. Here's the backstory.
Facebook's prompt answer to legitimate concerns
Going public with about a $100 billion valuation, the market certainly had lots of confidence in Zuckerberg and his motley team of programmers. But a number of big questions left unanswered in its first several quarters as a public company sent the stock spiraling downward. Going public at $38, shares reached all-time lows of $18 later in 2012 -- a price that would turn out to provide investors who bought at that price a monstrous 200-plus percent return based on the stock's price at the time of this writing around $58.
Two key questions nagged investors in the months following the IPO:
- Could mobile be effectively monetized? Before Facebook, there hadn't been any social company to meaningfully monetize a mobile feed yet.
- Can Facebook sustainably grow advertising revenue at high levels?
It didn't take long for Facebook to answer investor concerns. The first quarter Facebook reported any mobile advertising revenue (the third quarter of 2012), it jumped to a surprising 14% of total ad revenue. And since Q4, the company's year-over-year ad revenue growth rates increased in every quarter except one, rising from 40% growth in the fourth quarter of 2012 to a rate of 82% in Facebook's most recent quarter.
Old doubts about Facebook's mobile and revenue growth stories have faded. Today, Facebook is the mobile master. In Q1, Facebook's mobile ad revenue was up more than 200% from the year-ago quarter and accounted for 59% of its total ad revenue.
What's next for Facebook?
But now investors have new concerns.
First and foremost, Facebook is up against expectations. Its nearly $150 billion valuation is being brought into question. That figure is more than $100 billion higher than the market capitalization it reached when the stock hit all-time lows in 2012. Its price-to-sales ratio of 17 compared to Google's ratio of 5.7 shows just how optimistic the forward-looking assumptions priced into the stock are. In the last couple of months, Facebook stock has been subject to a broader sell-off among growth tech stocks as the market reevaluates the potentially exuberant price tags pegged to some of the sector's hottest names.
This ties into the second main concern investors have for Facebook stock today: How will the company continue to find new ways to monetize Facebook and thus grow into its stock price? Zuckerberg seems to be taking three approaches to continue to grow the company. First, Facebook wants to continue to improve its attractiveness as an ad platform. Two, it wants to create new value by offering more personalized ways to use Facebook outside the walls of a little blue app. And three, Zuckerberg wants to acquire the companies that could play big roles in the future of connection, e.g., its recent announcements of WhatsApp and Oculus acquisitions.
Zuckerberg has some tough challenges ahead. And making matters worse, expectations for Facebook are wildly high. Sure, two years after its IPO, the business looks better than ever -- and shareholders certainly shouldn't sell. But with such a rosy outlook priced into the stock, investors may want to hold off on buying shares.
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Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook and Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.