The Facebook Freakout

Investors’ Facebook animosity may be as irrational as their pre-IPO euphoria | “People love to see highfliers pushed off their ledge”

Brad Stone


It’s the dog days of summer, and Facebook’s stock price is locked in the kennel. Investors are obsessing over everything that’s wrong with the social network. Mark Zuckerberg hasn’t figured out how to make money on smartphones. Several million of its nearly 1 billion active accounts are duplicates, according to the company, and another few million may actually represent businesses or automated software bots — or even pets. Employees will soon be free to sell their shares en masse. Top executives are leaving. And on and on.

It wasn’t too long ago — three months, actually — that investors saw limitless opportunity at Facebook and its social-networking brethren Zynga and Groupon. For Facebook especially, the proverbial glass wasn’t half-full, it was overflowing. Sure, it had issues, but investors couldn’t wait to make the long-term bet that Mark Zuckerberg was building the next Google. As the stock hit $45 a share on its first day of trading in May, prevailing opinion began to flip. Since that peak, the share price has collapsed to around $20, and the IPO has become a symbol of hubris and mania. For Robert Shiller, the Yale economist and author of Irrational Exuberance, the mass delusion became obvious when a contractor he hired to repaint his dining room bought shares after the IPO. “That decision to buy Facebook was not an investment decision,” Shiller says. “It was a decision to become more than just a painter. Now he’s humiliated by it.” Shiller adds, “People don’t understand they are being drawn into some climax of public attention.”

It’s an age-old phenomenon: A bubble inflates until some dawning realization pops it. During the era a decade ago, the great popping came in the spring of 2000 after a series of skeptical articles about Internet valuations. For Facebook, the turning point was unusually clear: During the week of the offering, it added shares and increased the initial price to $38. That may have been a rational decision to maximize the money raised in the IPO. But along with subsequent technical problems with the offering at Nasdaq, the move planted seeds of anxiety that sprouted into a full-fledged freakout. Suddenly Facebook’s well-documented challenges took on a lot more importance. Each announcement over the next few months, about slowing advertising growth or mobile app usage, has been viewed through a far more pessimistic lens. Many people now seem to be gleefully rooting for the comeuppance of the new social media stars. “People love to see highfliers pushed off their ledge,” says George Loewenstein, a professor of economics and psychology at Carnegie Mellon University who has studied the role of schadenfreude in financial markets.

Culturally, Facebook is the dominant subject of conversation in the sewing circle that is Silicon Valley. Though it’s unlikely the drooping valuation will affect the region’s startup pipeline, since venture capital coffers are fully stocked, the state of California is bracing for the impact. The Legislative Analyst’s Office predicts hundreds of millions of tax dollars factored into the annual budget may not materialize. There’s also hand-wringing about a series of upcoming lockup expiration periods, after which Facebook employees will be free to sell their shares, which could decrease the stock price further. In the post-Facebook IPO world, fear begets fear.

That’s not to discount skepticism completely. Facebook and its ilk really do have significant challenges. Zuckerberg and his team need to figure out mobile and keep spambots off the network. Zynga, whose free social games are best experienced on PCs, is particularly imperiled by the shift to smartphones and by flagging interest in perennial time-wasters like FarmVille. Groupon faces the dangerous possibility that its users and restaurants will tire of the daily coupon model.

It’s also clear that feedback loops have exacerbated the cynicism about these companies’ prospects. Bad word of mouth, which spreads with increasing velocity over blogs and on the social networks themselves, amplifies the downdraft to the point where even good news is negatively interpreted. When Facebook met Wall Street’s expectations last month and posted 32 percent revenue growth — results that would have pleased investors in most $4 billion-a-year companies — its stock price shed another 10 percent.

Facebook and its newly public brethren can be viewed as wildly successful or embattled and paralyzed, and the perspective shifts in a blink. It’s like that classic optical illusion, the Necker Cube, a wire-frame drawing that the human brain perceives as three-dimensional. Look at the cube one way, and the front face of the cube is on the upper right. Blink, and the front is on the lower left. Stare for too long, and the effect gets unnerving. But it’s not the cube’s fault. It’s just you.

The bottom line Facebook’s 54 percent share decline from its peak says more about investor anxieties than the company’s prospects.


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