Facebook becomes ‘Fadebook’ as share price falls
Exactly a week ago, Facebook started selling shares on the open market. Expectations were high. But today, prices are dropping and investors are furious. Is Facebook heading for extinction?
Last Friday, in a blaze of publicity and hype, shares in Facebook went on sale on the open market. For the first time, anyone could buy a slice of the biggest social media company of all time. Facebook – said its fans – was the future of the internet; a company going places. Investors could pay $38 per share to come along for the ride. This was the biggest public sale (called an IPO) of all time.
One week later, those same investors have lost a combined total of around $600 million dollars, as shares in the company dropped from $38 to just $32 dollars each – a fall of more than 18%. Analysts predict the value of shares will continue to drop.
And the biggest losers were not, by and large, rich bankers or mage-corporations. Some were pension funds, looking after people’s retirement savings. Others were so-called ‘mom and pop investors’, playing the stock market independently in the hope of earning a little extra cash.
By contrast, big Wall Street investors with good financial contacts had some advance warning that shares would lose their value, and ended up much less badly off.
The real winners, meanwhile, were those people who already owned shares in Facebook before they were publicly available. Founder Mark Zuckerberg, for example, made fully one billion dollars from the sale.
There are two key reasons why Facebook shares have done so badly. First, the company was valued too high. The share price implied that Facebook was worth a total of $103 billion – even though it only made around one billion dollars profit last year.
Second, the company’s business model may be failing. Although the number of users has nearly reached a billion, the only revenue for Facebook comes from selling advertisements. Now, there is more and more evidence that Facebook advertising simply does not work.
This is a problem that could affect the whole internet. Web surfers are increasingly good at just filtering the adverts out. If online advertising loses its value, Facebook could go bust – along with half the advertiser-funded sites on the web.
Thousands are still holding onto their Facebook shares. Facebook is too huge to fail, they believe. It will one day have up to two billion users. For many of these people, Facebook is the channel through which they get their news, the place they store their photos and talk to their friends. Facebook is the future.
The pessimists, on the other hand, look to the past – a time when the internet was dominated by giants like Yahoo, Myspace or AOL. Those companies once looked invincible. Now they are practically obsolete. Could Facebook go the same way?
- Would you buy shares in Facebook?
- How much attention do you pay to online advertising? Does it ever affect the things you buy?
- Design the perfect online advertisement – something really attention grabbing.
- In groups, come up with an idea for a startup company that you think could change the future of the web, and write a pitch for investors.
Some People Say...
“The internet would be better if Facebook failed.”
What do you think?
Q & A
- I can’t afford shares in Facebook, so why should I care about the price?
- You might not be buying shares, but a pension fund – looking after your parents’ or grandparents’ savings – might have. More important, however, is what the Facebook share price tells the world about the future sustainability of the advertising-funded internet.
- Why’s that?
- At the moment, almost all online content is on websites that earn a living through advertising. That includes everything from blogs, tumblrs and YouTube to Twitter and most newspapers.
- So what happens if adverts stop selling?
- Those sites would either have to find a new source of revenue (like a paywall) or, more likely, go out of business.
- The first ever sale of company shares on the open market is called an Initial Public Offering. The people managing the sale set what they hope is a fair price for the shares, and then hope that the public will buy. If the price is too low, those who buy early make a good profit, as demand quickly pushes prices up. If the price is too high, as with Facebook, those who buy early make a big loss.
- Stock market
- Publicly traded shares are bought and sold on ‘stock markets.’ Stock markets are run by companies that take a cut from every transaction that takes place.
- Advance warning
- Facebook executives warned major banks earlier this month that profits might be lower than expected. These banks warned their most important clients, but ordinary investors were not told.