Facebook faces grave challenges after IPO hype

By Niu Hairong, Qiao Jihong

NEW YORK, May 18 (Xinhua) -- Online social network Facebook ended its first day of trading with a flat note on Friday at the Nasdaq Stock Market, only gaining 0.61 percent to close at 38.23 U.S. dollars.

The insipid performance made many anticipating a brilliant Facebook debut doubt if the excitement surrounding the "largest tech IPO" was just a hype?

Analysts expect great challenges ahead for the upstart company.

Biggest tech IPO ever

The first trade of Facebook stocks was made at the price of 42.05 dollars per share, 10.7 percent higher than the price set in the previous day for initial public offering (IPO) of 38 dollars, about two hours after founder and CEO Mark Zuckerberg rang the opening bell from Facebook's headquarters in Menlo Park, California.

Surrounded by cheering Facebook employees and wearing his signature hoodie, the 28-year-old and his 8-year-old social network company made history for raising about 16 billion dollars, the largest ever among all internet companies and nearly ten times as much as the money raised in Google's 2004 IPO.

The offering price gave the world's No.1 social media company a valuation of 104 billion dollars, on par with online retail giant Amazon and more than the combination of Dell and Hewlett-Packard.

If a greenshoe option for underwriters is exercised, which means a 30-day window for banks to sell additional 63 million shares, Facebook could raise up to 18.4 billion dollars, making it the second largest IPO in the U.S. history only after Visa.

Despite its flat gaining in price on the first day, its market popularity was undeniable as its trading volume has already exceeded General Motors one hour before the market close, thus setting another record.

Also, many Wall Street veterans were amazed by the fact that young Zuckerberg and his team were able to mop up billions of dollars at a time when the economy is still recovering from a painful recession and investors worldwide are staying away from risky assets like stocks.

Just before the IPO completed on Thursday, Facebook had filed two documents in a row to the Securities and Exchange Commission to raise the price range of its upcoming IPO and the amount of shares it will sell. The move also underlined the strong demand among investors to own a piece of the hot red stock.

Hot stock or tech flameout?

For a company that didn't even exist ten years ago, it's really impressive to have 900 million active users and an annual profit of one billion dollars.

However, is it impressive enough to justify a 100-billion-dollar market value?

According to a Bloomberg survey days before Facebook went public, 79 percent of investors, analysts and traders believed the company was overvalued.

Numbers probably makes more sense.

Microsoft is trading at only 11 times its net income for fiscal year 2011. Google is valued at about 20 times its 2011 profits. But as for Facebook, the price-to-earnings ratio is 100 at a market value of 100 billion dollars.

The 100-billion-dollar number is even crazier concerning revenue.

Google trades for just 5 times of last year's sales. Apple trades at only 4 times, but the number for Facebook was 27.

Some people would argue a rapidly growing company like Facebook deserves a fat premium, because people buying Facebook are buying the future.

But even with the best assumption that Facebook's profits increase 65 percent in 2012, like they did in 2011, the price-to-earning ratio for the company would be as lofty as 60. Not mentioning the company has already admitted in its IPO filing that it expects growth to slow down for both new users and revenue.

"You don't know what it will be like in five years," said billionaire superinvestor Warren Buffett, adding however that he wouldn't enter the Facebook arena.

"It's still a rich valuation, and unless they are going to monetize their user base, it's going to take a whole lot of growth to justify that," said Barry Ritholtz, CEO of FusionIQ, an equities research firm in New York.

Rocks down the road

Challenges remain for long-term growth, analysts say. After all the hype fades, Facebook may find it's not easy to live up to it.

As the world shifts toward using mobile phones, especially smartphones, investors asked Zuckerberg during the roadshow: has Facebook prepared itself for these changes?

Zuckerberg has been struggling for an answer.

Although 40 percent of its users log in at mobile phones at least once a month, Facebook still makes no money from mobile advertising.

How to fill the gap as quickly as possible in order to stay competitive is one of the major tasks for Facebook's board.

Analysts pointed out that it will be harder for Facebook to advertise at mobile phones than on personal computers since phone screens are much smaller. Besides, compared to rivals Google and Apple, Facebook doesn't have its own mobile platform, which is also believed to dent its competitiveness.

The company also faces rising pressure on privacy.

"One of the biggest challenges Facebook has faced is its privacy policies," Anindya Ghose, professor of New York Stern School of Business, expressed his concern about the social network's future.

Before its IPO, a German government official once warned potential German investors that Facebook's business is based on practices forbidden by European privacy laws, and its business model could "implode."

Just on its first trading day, Facebook was sued for 15 billion dollars, almost as much as the 16 billion dollars it raised at the record IPO, for tracking users against their wishes, even after they have logged out of their Facebook accounts.

Analysts said the ability to protect user privacy is crucial for Facebook's long-term growth. Once Facebook lost users' trust, it would be doomed.

Another challenge for the start-up is how to maintain a strong growth to justify its high valuation.

After seeing its sales surging at a phenomenal pace for the past few years, Facebook's first-quarter sales fell 6 percent from the 4th quarter of 2011 while revenue was unchanged.

Both Zuckerberg and his management team blamed seasonal factors for the slowdown.

But isn't it a little early for Facebook to be showing signs of the "seasonality" that is usually associated with more mature, cyclical businesses?

What's more, there is another thing Zuckerberg has to deal with -- pressures from shareholders, as Wall Street investors are notoriously impatient.