When Facebook stock began trading in May, lots of people dreamed of striking it rich by getting in early on the initial public offering (IPO). That's turned out to be one of the year's most bitter miscalculations.
Those who brought on day one at the IPO price of $38 a share have seen their investment fall by 50 percent. Facebook opened this week's trading at $19.41. So what happened to one of the Street's can't miss opportunities?
It turns out that at $38 a share, Facebook's IPO was way overvalued. The underwriters who set the price assumed that traders would buy "potential," the way they did during the dot-com boom when Wall Street bid up the prices of Internet companies that had never turned a dime in profit.
Even at $19.41 a share there are some who think Facebook stock is still overvalued. It's price-to-earnings (PE) ratio is 67 - meaning investors must pay $67 for every $1 of company profit. When the PE ratio is that high, the company must promise incredible growth to justify such a valuation. Meanwhile, you can buy another fast-growing company, Apple, and pay less than $16 for each dollar of earnings. Which looks like the better buy?
That's not to say that Facebook isn't now turning a profit and has the potential to earn more in the future. After all, when you have 900 million or so users, there should be a way to monetize all those eyeballs.
But what if having such a huge customer base turns out to be a giant Achilles heel? A review of recent consumer complaints about Facebook shows many users are frustrated with a particular aspect of the company but can find no way to communicate it.
Complaints about a lack of response
For example, an anonymous user in San Diego posted a complaint at ConsumerAffairs about an individual he claims is running a real estate investment scam on Facebook.
"He steals deposits, investment funds and is not a licensed real estate person," the user writes. "Facebook continues to host his page with no regard to the members that he is stealing money from. Facebook has been notified of the fraud. There has been no contact from Facebook with regard to any investigation."
Some users continue to express surprise when Facebook suspends their accounts because they have "friended" other users who say they don't know them. The suspended user expresses surprise because Facebook frequently suggests these people as potential new "friends."
"I was banned for seven days for befriending people online," Ricky, of Canaan, NH wrote at ConsumerAffairs. "When playing blackjack, people 'friend' people all the time, who they don't know and you people give extra money for friending. I think it's my right to choose who I can be friends with or not. If they accept, fine. If they don't want to be your friend, then don't accept them."
Customer service challenge
While Apple may be the world's biggest company in terms of market cap, Facebook is probably the world's largest in terms of "customers," though it collects no money directly from its users. But while having 900 million "customers" gives Facebook enormous potential, it also gives the company enormous headaches.
How do you deal with 900 million people? It's not like you can set up call centers all over the world to take phone calls -- though clearly many of the users who post complaints would like them to.
Meanwhile, Facebook's disappointing Wall Street debut has soured the mood for other IPOs, according to Jeffrey Goldberger, Managing Partner of KCSA Strategic Communications.
"With great anticipation, the US capital markets embraced the next generation of Internet sensations such as Facebook, Groupon and Zynga only to see the stocks prices of these companies plummet to levels well below their IPO price," Goldberger said. "So while initial backers, management and public investors have taken their lumps in the form of decreased stock value, the fallout of this negative sentiment has had an astonishingly detrimental effect on the IPO market."