Will Facebook Ever Dig Itself Out of This Hole?

Facebook’s (NASDAQ:FB) catastrophic initial public offering put the social network in a deep hole; its shares began falling within hours of its debut on the Nasdaq, and the stock is currently about 26 percent below its IPO price of $38 per share. Not only did it trip over its IPO, but the company has had a difficult time working its way back from the losses. Facebook has never really been able to convince investors and analysts that its business model can be truly profitable in the long run.

Analysts and investors may have temporarily forgotten these issues after evidence of mobile monetization in the third quarter, but the company’s fourth-quarter earnings brought monetization issues back into the spotlight. Ahead of the release, the stock was gaining upward momentum — it had increased 50 percent since November — but the run did not last. Analysts at BMO, Citigroup, and Stifel Nicolaus all hit “unfriend” the following day, downgrading Facebook’s stock based on the concern that the company was spending too much money on making its mobile platform generate higher revenues.

Now, analysts at Sanford C. Bernstein and BTIG have followed suit. They have identified a similar problem…

The social network may have generated 23 percent of its revenue from mobile advertising, an increase from the previous quarter’s 14 percent, but Facebook’s efforts to launch new advertising services — including those aimed at mobile — had a painfully large cost. As a far distant second in mobile advertising, behind Google (NASDAQ:GOOG), the company has struggled to beat its investors’ expectations and the competition. Its increased focus on advertising contributed to a 79 percent drop in net income, which shrank to $64 million as operating expenses jumped 82 percent. That growth outpaced the company’s 40 percent revenue gain.

BTIG upgraded Facebook back in November, but as with the stock’s gains, the positive sentiment did not last; on Tuesday, analysts lowered their rating on the company’s shares. To explain the downgrade from “Neutral” to “Sell,” the firm stated that the social network had not met its increased expectations. Analysts at BTIG also lowered their price target on the company’s shares to $22. For the past few days, the stock has been trading approximately $6 higher than that new target.
Facebook is not expected to dig itself out of this hole for at least several years. The firm has forecast growth in revenue and earnings before interest, taxes, depreciation, and amortization for 2013 to 2015 below what the Street has predicted. “With revenue and EBITDA growth set to disappoint, we believe a SELL rating is now warranted,” wrote BTIG analysts in a research note seen by TheStreet.

Bernstein’s Carlos Kirjner also cut his rating on the company on Monday. Facebook was downgraded from “Outperform” to “Market Perform,” and its price target was lowered from $33 to $27. He wrote in a research note seen by Barron’s that the company’s fourth-quarter mobile revenue improvements were already priced into the stock, and said that despite the “significant untapped monetization opportunities” for the company, the “upside is now in consensus” estimates on the stock. Kirjner also noted that the 18 percent increase in Facebook’s average ad price was “anemic” and that such slow growth will hurt Facebook’s year-over-year comparisons a year from now unless it achieves “a pricing-power inflection.”

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