SAN FRANCISCO (Reuters) - Facebook Inc’s underwhelming debut on Wall Street increases the pressure on the social networking giant to deliver stellar growth - a novel situation for Chief Executive Mark Zuckerberg, who has been clear he is more interested in building products than making money.
Facebook shares fell 11 percent on Monday, the company’s second day as a publicly traded company, due to what many analysts and investors blamed on overly aggressive pricing by Facebook’s underwriters, as well as a decision to expand the size of the offering by 25 percent.
The poor stock market performance has intensified the scrutiny of Facebook’s business, raising the bar for the company to regain Wall Street’s confidence, say some investors and analysts.
“What’s most important now to investors is top line growth,” said Michael Binger, a senior portfolio manager at Gradient Investments. “If they’re interested in seeing their stock work, they need to have a good quarter,” he said, referring to Facebook.
Falling below the offering price is damaging to investor “psyche” noted Binger, who has personally bought some shares in Facebook but whose firm does not have a position.
“People who usually would be buying are now going ‘Something is seriously going wrong here.’ Emotions and skepticism take over,” he said.
Facebook generated $3.7 billion in revenue in 2011, with net income of $1 billion - a sharp contrast to some of the money-losing Web companies such as Groupon Inc and Pandora Media Inc, that have recently gone public.
But Facebook’s revenue growth has been slowing in recent quarters, raising flags among some investors who believe a company such as Facebook should be delivering consistently strong revenue growth at this stage in its life.
“Wall Street is a severe task master and they’re going to want to see quarterly results, then guidance, then subsequently they’re going to want to see that guidance beaten, and then the guidance raised,” said David Rolfe, chief investment officer of Wedgewood Partners.
“Either they deliver those results and make folks happy, or they’re going to see another element of Wall Street, that ‘Hey - when you have a richly valued stock you must deliver, or the stock’s going to correct and correct hard,’” said Rolfe.
Shares of Facebook, which priced at $38 in last week’s IPO, finished Monday’s regular session at $34.03, with more than 168 million shares trading hands — more than seven times the volume of Apple Inc on Monday.
Zuckerberg, the 28-year-old Facebook CEO who controls 56 percent of the company’s voting shares, has signaled that short-term financial considerations are not the priority.
In Facebook’s prospectus, Zuckerberg wrote in a letter to investors that “we don’t build services to make money; we make money to build better services” and referred to the company’s “social mission.”
It’s precisely Zuckerberg’s long-term perspective and his product-first approach that many investors are betting on.
“Everything that I understand about the company is that they’re trying to build something for the long term,” said Ken Allen, a partner at The Blackstone Group. “The idea that simply because the IPO trades down after a couple days that Mark Zuckerberg is going to change drastically...I don’t think that’s going to happen.”
Still, he noted that Facebook’s falling stock price was “certainly a negative from a kind of momentum standpoint and potentially an employee morale standpoint.”
With 900 million users, Facebook has become one of the Web’s most popular online destinations, challenging established businesses such as Google Inc and Yahoo Inc.
Among the key challenges for Facebook is consumers’ use of smartphones to access the mobile version of the service on which Facebook currently shows only limited ads. Just before the IPO, Facebook in a regulatory filing flagged this as an area of concern due to the lower revenue potential of mobile.
Some marketers have also questioned the long-term potential of Facebook’s main advertising business, with General Motors’ decision to stop spending money on Facebook ads last week underscoring the concerns.
While Google’s search-oriented advertising has proven consistently effective and profitable, and continues to grow, Facebook has yet to show that its huge store of personal information about its users user will translate into similarly high-margin advertising on a mass scale.
Facebook’s dual-class share structure, which gives Zuckerberg majority control, and other governance practices such as Zuckerberg’s role as CEO and Chairman of the board, have also been criticized.
While Facebook’s corporate governance practices leave much to be desired, the company is unlikely to feel any real pressure for change from investors for some time, said James Post, a professor of management at Boston University.
If the company were to make a costly strategic blunder which raised questions about Zuckerberg’s leadership, that might increase pressure for change, said Post.
At this point however, Post said, “the sentiment is just the opposite. What investors are really betting on is his continued leadership of the company.”
Editing by Jonathan Weber and Muralikumar Anantharaman