Things got worse for Facebook Friday, and its stock fell to a new low, as several Wall Street analysts covering the company turned more negative on the social networking leader.
Facebook stock FB closed down $1.03, or 5.4%, to $18.06 after research firm BMO slashed its price target on the stock from $25 a share to $15, reflecting lower expectations for revenue growth.
The continued fall of Facebook shares is cementing Facebook as potentially one of the worst debuts for a initial public offering (IPO) in such a short period of time, says Jay Ritter, professor of finance at the University of Florida. Shares of Facebook have fallen 52% from their IPO price of $38 a share May 18.
Having an IPO lose half its value this soon after its debut is rare, Ritter says. Of more than 1,000 IPOs between 2001 and 2010, just 5% were down 50% or more six months after the offering, he says. Facebook has traded for less than four months.
"Most of these (poorly performing IPOs) had optimistic expectations build in," he says.
And it's exactly those lofty expectations that continue to be whittled down by a number of powerful forces including:
•Less bullish forecasts from analysts. BMO cut its stock forecast on Facebook to $15 in part because many advertisers are "reevaluating performance of Facebook ads," analyst Daniel Salmon says in his report.
Meanwhile, Jordan Rohan, analyst at Stifel Nicolaus, cut his 2013 revenue forecast by $50 million and earnings-per-share forecast by a penny to 59 cents a share. While the stock price is more compelling, Facebook's near-term earnings trends warrant caution, Rohan wrote.
•Pressure from insider selling. An avalanche of stock unlocked this month continues to put a lid on Facebook's share price as the supply of shares overwhelms buyers. Heavy selling by insiders, including early investor Peter Thiel and co-founder Dustin Moskovitz, isn't encouraging investors who might think the shares are cheap.
"Selling by key insiders (and venture capitalists) has set a precedent for other sponsors and employees to sell heavily below $20 per share," Rohan said in his report. Meanwhile, three more lockups expire this year, allowing insiders to sell more than 1.5 billion shares if they wish. Another lockup expires next year.
•Still-lofty expectations. Analysts are still calling for 4% revenue growth in the third quarter vs. a year ago, which could be challenging in the seasonally slow quarter, Salmon says. After the stock's fall, shares are still trading for 66 times earnings reported for the past twelve months, says S&P Capital IQ. That's rich even compared with Internet rival Google, which is trading at 20 times earnings measured the same way.
All that said, a bad first six months for a stock doesn't predict the future, Ritter says. Rackspace Hosting RAX, which provides computer services, was one of the worst IPOs in its first six months, falling more than 60% from its offering price. The stock has since rocketed higher.
"There's no simple trading rule based on the first six months of trading," he says.