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Facebook Inc (FB)’s Roller Coaster Ride

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The year 2012 has been a bag of mixed surprises for Facebook Inc (NASDAQ:FB). From its initial public offering at $38 in May 2012, it went all the way down to a mere $17.55, a decrease of almost 53 percent within a span of three months. And when almost everyone had given up on Facebook, they fought back and ended the year at around $27. The journey is quite similar to a roller coaster ride, as you can see in the chart below:


*Source: http://money.cnn.com

Let us look at the reasons behind this swinging pendulum of Facebook Inc (NASDAQ:FB)’s stock prices.

Reasons for Such a Steep Drop:

Overpriced IPO: The company’s initial price of $38 was overpriced, as per the expectations of many analyst. This led to an initial dip in the company’s share prices within its first few days of trading. Traders expected the company to go down in the first few months, and that is the reason the stock became bearish in its initial days.

Acquisition of Instagram: When Mark Zuckerberg announced the acquisition of Instagram for a mammoth $1 billion, people started questioning the sustainability of Facebook on a long term basis (though later it was devalued at $730 million). Despite the fact that Instagram is one of the most popular photo-sharing social-networking services, its acquisition at such a high price was not justified.

Revenue Model: Of all the reasons, the biggest reason has been their inability to display a long term sustainable revenue model. Just like Google Inc (NASDAQ:GOOG)’s Orkut, which after its initial success had a steep downfall, many are predicting the same downfall for Facebook Inc (NASDAQ:FB). This raised a lot of questions on keeping the shares for the long term. At that point of time, even Mark Zuckerberg was unable to convince people with his words. The result was visible as the share price dipped by around 54 percent.

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