Facebook plunges on fears for its mobile ad problems

FACEBOOK shares slumped to an all-time low yesterday as investors debated whether the social website can convert users into cashflow on the increasingly mobile internet.

Investors wiped $10 billion (£6.4bn) off the company’s value in the first hours of trading after Facebook’s maiden quarterly update as a quoted company. The stock reached a record low of $22.28 yesterday morning before recovering to slightly more than $23 per share – an overall decline of some 40 per cent since May’s $100bn flotation.

Despite hitting revenue targets and increasing user numbers, analysts pointed out that Facebook had yet to prove whether it can generate rising profits as its 955 million active users migrate away from the desktop. Investors were also rattled by a lack of earnings guidance from the company.

In a conference call headed by founder and chief executive Mark Zuckerberg, he noted that the “shift towards mobile is incredibly important”. An estimated 543 million people looked at Facebook via a mobile device during June, and increase of 67 per cent against a year earlier.

The company is now making less money per user because of the difficulty in placing advertising on the limited space of mobile devices. Executives said they were seeing promising results from newly-released mobile ads, but added that they are taking care not to crowd the platform and spoil the user experience.

David Wain-Heapy, operations director at London’s Best Response Social, said the jury was still out on whether Facebook could justify its “insane valuation”, which at $24 would still be trading at about 70 times earnings.

“Facebook needs a stronger mobile strategy but that’s simply not evident yet,” he said.

“Is it moving as fast as it should be within the mobile space? Probably not. The IPO may have seen it take its eye of the ball.”

However, others are more sanguine on the company’s prospects. Vanessa Barnett, technology and media partner at law firm Charles Russell, said quarterly revenue growth of 32 per cent to $1.18bn was a “success, whichever way you cut it”. Though margins are down and costs up, she said Facebook was taking the right steps towards growth.

“Everyone is using Facebook, everyone is going mobile in terms of how they connect with their friends and how they consume information and content,” Barnett said. “Facebook has become a utility in our daily lives and now it’s really about how Facebook executes on that.”

Overall, the company reported a loss of $157m (£100m) for the second quarter as costs nearly quadrupled to $1.93bn. The rise was driven primarily by “share-based compensation expense” associated with the flotation.

Excluding staff share schemes, Facebook would have made a profit of $295m. Year-on-year sales growth of 32 per cent was down from 45 per cent in the first quarter.