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Why Facebook Stock Has Much Farther to Fall

After Facebook Inc. (Nasdaq: FB) CEO Mark Zuckerberg addressed the public earlier this month to stem concerns over the stock's steep and steady fall, Facebook shares enjoyed a mild rally.

That was fun for investors while it lasted.

Facebook stock Monday renewed its descent, dropping 11% before stabilizing a bit to finish the day down 8.3% at $20.79.

Monday's intraday decline was the steepest since July 27. It was so sharp it tripped Nasdaq's circuit breakers meant to shield investors from short-seller manipulation.

Sparking this week's selloff was a fresh report from Barron's that said the company is overvalued. Renewed concerns over how quickly the social-networking behemoth can capitalize on revenue from the exploding number of users who access the site via mobile devices and tablets contributed to the drop.

Tuesday morning, the selling continued.

Before the recent selling spree, shares of the Menlo Park, CA-based company had given back some 45% since its hugely hyped initial public offering on May 18.

But that decline isn't enough.

Barron's gave Facebook a best-case scenario of $15 per share.

Editors Note: We think $15 per share is still too generous – .

The $15-per-share valuation amounts to roughly 24 times projected 2013 profits and six times estimated 2013 revenue of $6 billion.

"Still no bargain price," Barron's noted, saying the stock trades at "high multiples of both sales and earnings, even as uncertainty about the outlook for its business grows."

Here's why FB stock will keep drifting toward that Barron's target price.

Facebook's Ad Market Woes

Ranked sixth in the U.S. mobile-ad market, Facebook struggles to keep pace with rivals.

Facebook claims just 2.8% of the $2.61 billion market, according to EMarketer Inc. Google (Nasdaq:GOOG) leads at 55%, followed by Pandora Media Inc. (NYSE: P) with 8.7% and Twitter with 5%.

At the September TechCrunch conference in San Francisco, Zuckerberg acknowledged the company has failed to monetize the growing mobile arena in the past, but assured shareholders the company is morphing into a true mobile company.

The following day, giddy shareholders sent shares up 7.7%. But the rally was short lived.

Success in the mobile market is "no sure thing" Barron's noted. Mobile ads must fit into much smaller screens, which doesn't allow Facebook "much room to configure ads without alienating users," the Barron's article explained.

Plus, as Facebook transitions to mobile it'll lose revenue from desktop users at a faster rate than it succeeds in mobile.

"We do not believe success in mobile for Facebook can come without some collateral damage in near-term to the larger, more profitable desktop platform. We assume that revenue upside from mobile is a bit further off than Zuckerberg was signaling," Jordan Rohan, an analyst at Stifel Nicolaus told Bloomberg News.

EMarketer also expects Facebook to lose its lead in the larger display-advertising market in the U.S., a spot it snagged from Yahoo! Inc. in 2011. The social-networking giant is projected to bring in $2.16 billion in display ad revenue for 2012. Estimates for Google are $2.31 billion, placing it on top.

LinkedIn Corp. is also lurking in Facebook's territory. The headhunting, career networking company is transforming into something bigger – Facebook big.

A few weeks ago, LinkedIn rolled out a new notification system and launched an update for its mobile phone apps which now inform a member when someone likes or comments on one of their status updates – just like Facebook.

The moves were in response to the flourishing traffic generated from smartphones and tablets. LinkedIn has been quick to reap the benefits of the thriving mobile trend, unlike Facebook which has notably lagged in the dynamic drift.

"I think we know that we're going to do well on that. The question is getting there," Zuckerberg admitted earlier this month.

Zuckerberg Can't Stop Facebook Stock Slump

Facebook stock also enjoyed an upward spurt after Zuckerberg pledged not to sell any shares for at least a year as the expiration of lockup periods has many investors fleeing. Billion of shares will flood the market by the end of the November.

Select employees are free to sell 234 million shares by Oct. 29, and another 777 million shares are set loose on Nov. 14.

Scores of early investors sold their stakes as soon as permitted, pressuring the price and causing potential investors to sit on the sidelines until the lockups are over.

Shares were poised for a bounce Monday after being added to the Nasdaq Q-50 index, which is widely viewed as a stepping stone to influential Nasdaq 100-index, an assortment of the most valuable non-financial stocks trading on the Nasdaq exchange.

But, Facebook suffered the Barron's bounce – downward.

As word spread and portfolios dwindled further, the bears came out again Tuesday pushing FB shares lower. Facebook stock was trading down 1.7% to $20.44 30 minutes before market close.

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Join the conversation. Click here to jump to comments…

  1. Larry Chason | October 9, 2012

    I would like an update on facebook

    • CouldntCareLess | October 27, 2012

      Here is an update. Get a life. Zuckerburg doesn't give two hoots about you.

  2. vicktor | November 11, 2012

    FaceBook (FB) is going to go down below 10, in fact, it will be a great buy at 8 and then keep for years. I've been saying that since day one of it's first IPO…

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