August 26, 2012

Is Zuckerberg At Fault For Facebook Stock Decline?

April Flowers for - Your Universe Online

Facebook went public three months ago, with an IPO opening of $38 dollars a share, which has steadily fallen. The stock price reached an all time low Monday morning of $18.75.

Investors and Wall Street are looking for some place to lay the blame for such a poor showing and Mark Zuckerberg, Facebook's founder and CEO, is the natural target. The 28 year old built Facebook from a Harvard University dorm-room project into a publicly traded company with 900 million monthly users. Facebook earned $3.7 billion in revenues and $1 billion in profit last year.

The innovation of Zuckerberg and the strong profit margin notwithstanding, the stock slump this week has critics openly questioning whether Facebook's CEO has the maturity necessary to navigate in the corporate world. One derisive comment heard more than once from the buttoned down Wall Street culture is that Zuckerberg is "in over his hoodie."

"He is a brilliant guy. He is the visionary behind this company. But ... what he is not, is CEO material," Newsweek columnist Joanne Lipman told CNN this week.

Some of the stock troubles can be traced back to a change of strategy between its IPO and the first earning call which significantly increased Facebook's operating costs. Most revenue for the company comes from advertizing, but the company has failed to explain what it is spending its new revenue on, and how or when those investments will translate into real profits.

The biggest problem that most see is a loss of faith that stems from bad communication from Zuckerberg to investors.

"It's his responsibility; it is his obligation to deal with investors," said Michael Pachter, an analyst with Wedbush Securities. "I'm not sure he cares enough, and I think the management is going to do what the CEO tells them to do."

Pachter also says that a lack of transparency can create uncertainty, which causes people to either sell the stock they already have or wait to learn more before buying.

A difference in age and on-line culture could also have something to do with it. Facebook was designed to appeal to the college crowd. Though its market has expanded both up and down in the age ranges, the most common investor is more likely to be found on LinkedIn (a social network website for people in professional occupations) than on Facebook. It's hard to have faith in something you don't use or understand.  More communication from Zuckerberg is needed to combat this culture gap for investors.

It is hard to retain faith when even the faithful are jumping ship. Two of Zuckerberg's initial investors have divested themselves of most of their shares. Peter Theil, venture capitalist and Facebook board member, unloaded the majority of his shares this week bringing his total profit from the company to more than $1 billion dollars. Dustin Moskovitz, co-founder of Facebook and Zuckerberg's Harvard roommate, sold nearly 450,000 shares in recent days, netting about $8.7 million. Moskovitz still owns more than 132 Class A and B shares, but dumping that much has other investors wondering what is going on.

Facebook employees aren't able to sell their shares yet, but that is coming. When a company goes public, the shares of employees and early investors are "locked up" for set time periods, and those lockups are starting to expire. If Zuckerberg can't regain the confidence of both investors and his employees, they could soon begin dumping their stock, causing the price to fall even farther.

Zuckerberg addressed employee concerns in an August meeting, saying he knew it was "painful" to watch the stock prices drop.

"He focuses on shipping and user experience. He gives his employees a mission to believe in," Brian Solis, an analyst at Altimeter Group, who favorably compares Zuckerberg's strategy to that of Steve Jobs, another tech-company founder who focused on products above investors.

Though Zuckerberg is the face of Facebook management, he isn't leading the company on his own. He has surrounded himself with experienced business veterans, like COO Sheryl Sandberg, who previously worked at Google, Inc., and the U.S. Treasury Department.

Despite Wall Street speculation about whether Zuckerberg should step down as CEO, his job is safe. He very wisely retained 20.7% of Facebook's stock and has a 57% voting stake in the company. Investors also recognize how much his image and leadership style and innovation are to the Facebook brand.

"He has not proven his lack of ability and he has not yet proven his ability," Pachter said. "So let's give him a few more quarters and see what he does."