Facebook bubble shows every sign of bursting

Ever since Facebook announced its over-priced IPO we have been warning that unless there were some significant changes at the company, it was a bubble waiting to burst.

Since then we have seen the company’s share price slowly fall as investors realise they bought a Ford Prefect when they thought they had a Rolls Royce.

Yesterday, Facebook confirmed what we have been banging on about for months. Its growth is slowing and its profits are flatter than a plaice which has been trodden on by an elephant.

Shares in the social networking group fell more than 10 per cent to hit a low of $23.84. They had already fallen 8.5 per cent during the day after the poor results of Zynga, the gaming company, which is built on Facebook.

This means that people who rushed to buy the shares in the initial IPO have lost nearly half their cash.

David Ebersman, Facebook’s chief financial officer admitted that he was disappointed with how the stock has traded but claims the corporation is staying focused on the fact that “we’re the same company as we were before”. We think that is is part of the problem David.

The company reported a second-quarter loss of $157 million mainly due to costs related to stock-based compensation expenses associated with the IPO. Last year, Facebook made $240 million.

Total revenues stood at $1.18 billion for the quarter, in line with estimates analysts had set after Facebook warned that things were not going as well as it had hoped.

On the plus side, revenues grew 32 percent year-on-year in the second quarter, but this was a deceleration from growth of 45 percent in the first three months of 2012.

In short, Facebook is doing OK, but nothing like the huge growth machine that many investors hoped it would be when the IPO happened.

Investors might also be alarmed that the company is spending like crazy. The company added more engineers perhaps in the hope of coming up with better ideas to fuel growth. This might work, but it is a risky strategy as Ashton-Tate demonstrated way back in the 1980s before Mark Zuckerbeg was born.

Most of Facebook’s cash comes from advertising, generating $992 million for the company in the second quarter.

But new ad products introduced in the last three months did nothing to boost advertising revenue. Which actually fell by a quarter.

To make matters worse, mobile advertising has not grown as quickly as mobile usage.

Let’s be clear about this. Unless Zuckerburg really cocks up, Facebook is a viable company, but there is no way it is worth what investors paid for it. Share prices will continue to fall until Facebook starts producing the sort of growth that justifies value.