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Could someone explain, how the low stock price is bad for Facebook? They are profitable, so they aren't going to go bankrupt. And they made a lot of money on

by tedsuo 14y ago

Could someone explain, how the low stock price is bad for Facebook? They are profitable, so they aren't going to go bankrupt. And they made a lot of money on the IPO, arguably more than they should have. Doesn't this mean the joke is on everyone but facebook (the company, not including the stock-owning employees)? Through what mechanism does it come back to bite them? Not defending them, just uneducated on this side of business.

rieter 14y ago
Hiring and retention.
tobtoh 14y ago
One way it is bad for FB is it makes it harder to make acquisitions. Frequently, when you buy out another company, you offer a mix of cash and stock ... but if your stock is tanking ...
mikescar 14y ago
Yahoo's been profitable for a long time, but their imminent death has been on the books for years. No growth, so the stock doesn't increase. Facebook was somehow hyped as being above the middling concerns that every other public company must address. But they are not, and have lost value accordingly.
frankienwafili 14y ago
Well you have to remember that the stock price already takes all of this into account. The problem with Facebook's price is that it's based on expectations far higher than what it seems like Facebook will be able to achieve in the near future.
gsibble 14y ago
Well, all of those Facebook employees have lost 41% of their value of their options portfolio since the IPO. Imagine how you would feel seeing 41% of your hard earned cash just evaporate because management priced the IPO too high or doesn't care about the stock price. There's many more reasons, but that's a big one. No one is going to come work for a company for equity that doesn't care about their stock price.
- abc_lisper 14y ago
  > hard earned cash What??
  - wisty 14y ago
    Microsoft had the same problem. Facebook employees apparently work pretty hard. They get huge rewards, when their stock goes up, so they want to company to succeed. Once the stock stops shooting up, they stop caring about the company. They won't make money from their stock options, they'll make money from getting promotions or a good bonus. Impressing their manager is going to be more important than the company's overall success. Employees will lose interest, and managers will have to introduce more rules, to "incentivise" the workers (and other managers).
    - Zenst 14y ago
      You raise a very interesting point. The aspect were a employee's motivation is two-fold. One were it is stock-option motivated and the other were progress in the company is the motivation. Now they should and you would of thought that they would be one and the same. But from personal experience they are seperate. Gets down to the classic: it's not what you do but how you are seen to be doing it.
  - vikas5678 14y ago
    Are you saying stock options are not a reward for their hard work? Its a part of their compensation package, they had to work for it. Its not a lotto.
    - z92 14y ago
      He is saying whatever they earned is not "cash".
- guynamedloren 14y ago
  Imagine all the employees who were paper 'millionaires' (just over a million) for a short while, but no longer are... that's got to be a bit disheartening.
drgath 14y ago
At $22, they are just fine. But if it continues to drop, then you will start to see some changes at FB as they have to free up high operational expenses. If it goes sub-$15, then they'll start making some tough decisions. Edit: So based off the downvote, either someone didn't like my lack of explanation, or it Zuck is lurking on HN. I'm guessing the former, so I'll explain. FB's value is so heavily tied to future growth expectations. Current P/E is 116, and compare that to a peaked out company whose P/E is more typically between 10-20 (see: YHOO, GOOG, APPL, ADBE, ORCL). If FB gets to $15, it's a P/E of 82, $10 = P/E of 55, $5 and you have 27. At $5 and its current earnings, FB is basically toast as an "innovative" company. So, I say a "sub-$15" value above because once it gets to that point this quickly after the IPO, dropping into single digits has to be a possiblity they consider. They won't have billions of dollars at their disposal to do whatever they please and will have to be more judicious in their spending. P.S. I'm a programmer, not a finance-guy, so please correct me if I'm wrong about something.
- z92 14y ago
  As the first part, I think you are confusing between profit and share price. They have to cut expense if they are making net loss or are in cash flow negative. Which is quite different from share price. And as of your second part. Why would not FB have billions of dollars at their disposal if their share price tanks? They sold the IPO and already have got that cash in their bank account. They won't gain a single dollar if the share price rises neither won't they lose a single dollar if it tanks. But is there an indirect relation besides the obvious? That's what the original poster asked. Your answer didn't reply it.
- 1123581321 14y ago
  I see what you're trying to say; let me try as a programmer and a finance guy. 1. A lower stock valuation affects their ability to raise money and greatly reduces the amount raised, 2. Affects morale because employee stock holdings and options are worth less, 3. Causes investors to put social or board pressure on Facebook to make changes, effectively reducing management's control, 4. Possibly attracts SEC or DoJ attention which could mean time-expensive hearings and possibly fines for misstatements (a.k.a. lies.) 5. Has a psychological effect on users who want to be part of something popular and winning and on app developers uncertain if they want to trust a company on the downs with their livelihoods. Edit: this doesn't concern Facebook directly, but its investors and its newly created millionaires/billionaires will want the price to stay up so it doesn't affect IPO prospects of their other companies. This is more the case for VC with a steady deal pipeline than the newly rich employees who won't have anything ready for IPO for several years, possibly with an entire cycle between now and then.
veyron 14y ago
This is not a single-round game. The financial markets represent effectively an infinite game (in game theory jargon), where you assume that the operation isn't closing today. Therefore, you have to consider both the short-term effects and the long-term effects. Short-term this is good for FB but long-term this is terrible (have to give more equity to attract people, you can't borrow as much against your shares, etc.)
ChuckMcM 14y ago
Well in the valley its hard to use stock incentive stock options as a lure if the stock price is going down. That can force you into giving out stock grants and those have their own set of annoyances. If your stock is going down you are less able to raise capital by doing a private placement (basically a pre-planned sale to fixed investors kind of like Zynga did and is currently being sued for) Anytime a company sells a large amount of stock, and then the stock continues to go down, a number of law firms will file lawsuits. Perhaps most importantly your 'buying power' is reduced. If you notice there are a lot of 'acquihires' going around. Those can be done 'all stock' when the stock is strong but require 'cash and stock' or worse 'all cash' when the stock is weak. So if Facebook wants to continue to gobble up things like Instagram is can't go into a deal with "Hey, its a billion dollars, uh today, perhaps on Friday it will be 800 million." [1] [1] Yes, I know its more complicated than that but I simplify for brevity.
- tedsuo 14y ago
  Thanks, that was succinct and informative.
gscott 14y ago
If it gets low enough, they can just buy the remaining stock, go private again, find new revenue sources, then go IPO again. This may be the plan. Any normal CEO would be out their detailing future plans, like launching in new countries, new revenue initiatives, etc.
- megablast 14y ago
  That would not look good. I think everybody sees the value in facebook in the tech world, for all the data they have, but the general public does not.
  - z92 14y ago
    That would not be good for the general public. But probably will be a good strategy for FB-the-company if stock values go down. That will make it look like a cycle of cashing the over hype.
MyNewAccount99 14y ago
why did facebook need all that money from the IPO anyway?
- leothekim 14y ago
  Not clear that they needed the IPO money. I think they had to have an IPO due to SEC regulations. http://www.pehub.com/146588/the-%E2%80%9Cfacebook-problem%E2%80%9D-secondary-market-trading-and-the-500-shareholder-rule-part-2-of-a-4-part-series-on-the-jobs-act/ http://www.pehub.com/146588/the-%E2%80%9Cfacebook-problem%E2...
- ramblerman 14y ago
  As a private company there is a 500 shareholder limit. This made it difficult to use stocks to 'incentivize' employees. The second argument I've heard is that it allowed Zuckerberg and some of his closer companions to cash out a large chunk of cash for the first time. Facebook itself did not need money to my knowledge
zeroonetwothree 14y ago
If their stock is perceived as stagnant or declining, it makes it harder to attract top employees (and retain existing employees). It also hurts the morale of all the employees that started working in the past ~12 months, whose equity was valued at an amount higher than $20.
jonnathanson 14y ago
The perception that they're overvalued, or poorly managed, or what have you, hurts their ability to sell big advertisers on big-ticket advertising deals. These have been their bread and butter all along. Over the last few years, many Fortune 500 companies signed $20MM+ yearly deals to advertise on Facebook, develop fan pages, etc. Some -- most infamously, GM -- are starting to pull back (or pull out altogether). In very basic terms, Facebook makes the majority of its money from advertising. It makes the majority of its advertising money from a relatively small handful of very big advertisers. Shaken confidence in Facebook, for whatever reason, shakes the confidence of these advertisers, which jeopardizes Facebook's ability to make money. All of this is leaving aside the financial damages associated with declining market cap. In a weird way, that's actually less relevant than the effect the busted IPO is having on Facebook's position in the ad sales business.

by tedsuo 14y ago

rieter 14y ago

Hiring and retention.

tobtoh 14y ago

One way it is bad for FB is it makes it harder to make acquisitions. Frequently, when you buy out another company, you offer a mix of cash and stock ... but if your stock is tanking ...

mikescar 14y ago

Yahoo's been profitable for a long time, but their imminent death has been on the books for years. No growth, so the stock doesn't increase. Facebook was somehow hyped as being above the middling concerns that every other public company must address. But they are not, and have lost value accordingly.

frankienwafili 14y ago

Well you have to remember that the stock price already takes all of this into account. The problem with Facebook's price is that it's based on expectations far higher than what it seems like Facebook will be able to achieve in the near future.

gsibble 14y ago

Well, all of those Facebook employees have lost 41% of their value of their options portfolio since the IPO. Imagine how you would feel seeing 41% of your hard earned cash just evaporate because management priced the IPO too high or doesn't care about the stock price. There's many more reasons, but that's a big one. No one is going to come work for a company for equity that doesn't care about their stock price.

abc_lisper 14y ago
> hard earned cash What??
- wisty 14y ago
  Microsoft had the same problem. Facebook employees apparently work pretty hard. They get huge rewards, when their stock goes up, so they want to company to succeed. Once the stock stops shooting up, they stop caring about the company. They won't make money from their stock options, they'll make money from getting promotions or a good bonus. Impressing their manager is going to be more important than the company's overall success. Employees will lose interest, and managers will have to introduce more rules, to "incentivise" the workers (and other managers).
  - Zenst 14y ago
    You raise a very interesting point. The aspect were a employee's motivation is two-fold. One were it is stock-option motivated and the other were progress in the company is the motivation. Now they should and you would of thought that they would be one and the same. But from personal experience they are seperate. Gets down to the classic: it's not what you do but how you are seen to be doing it.
- vikas5678 14y ago
  Are you saying stock options are not a reward for their hard work? Its a part of their compensation package, they had to work for it. Its not a lotto.
  - z92 14y ago
    He is saying whatever they earned is not "cash".
guynamedloren 14y ago
Imagine all the employees who were paper 'millionaires' (just over a million) for a short while, but no longer are... that's got to be a bit disheartening.

drgath 14y ago

At $22, they are just fine. But if it continues to drop, then you will start to see some changes at FB as they have to free up high operational expenses. If it goes sub-$15, then they'll start making some tough decisions. Edit: So based off the downvote, either someone didn't like my lack of explanation, or it Zuck is lurking on HN. I'm guessing the former, so I'll explain. FB's value is so heavily tied to future growth expectations. Current P/E is 116, and compare that to a peaked out company whose P/E is more typically between 10-20 (see: YHOO, GOOG, APPL, ADBE, ORCL). If FB gets to $15, it's a P/E of 82, $10 = P/E of 55, $5 and you have 27. At $5 and its current earnings, FB is basically toast as an "innovative" company. So, I say a "sub-$15" value above because once it gets to that point this quickly after the IPO, dropping into single digits has to be a possiblity they consider. They won't have billions of dollars at their disposal to do whatever they please and will have to be more judicious in their spending. P.S. I'm a programmer, not a finance-guy, so please correct me if I'm wrong about something.

z92 14y ago
As the first part, I think you are confusing between profit and share price. They have to cut expense if they are making net loss or are in cash flow negative. Which is quite different from share price. And as of your second part. Why would not FB have billions of dollars at their disposal if their share price tanks? They sold the IPO and already have got that cash in their bank account. They won't gain a single dollar if the share price rises neither won't they lose a single dollar if it tanks. But is there an indirect relation besides the obvious? That's what the original poster asked. Your answer didn't reply it.
1123581321 14y ago
I see what you're trying to say; let me try as a programmer and a finance guy. 1. A lower stock valuation affects their ability to raise money and greatly reduces the amount raised, 2. Affects morale because employee stock holdings and options are worth less, 3. Causes investors to put social or board pressure on Facebook to make changes, effectively reducing management's control, 4. Possibly attracts SEC or DoJ attention which could mean time-expensive hearings and possibly fines for misstatements (a.k.a. lies.) 5. Has a psychological effect on users who want to be part of something popular and winning and on app developers uncertain if they want to trust a company on the downs with their livelihoods. Edit: this doesn't concern Facebook directly, but its investors and its newly created millionaires/billionaires will want the price to stay up so it doesn't affect IPO prospects of their other companies. This is more the case for VC with a steady deal pipeline than the newly rich employees who won't have anything ready for IPO for several years, possibly with an entire cycle between now and then.

veyron 14y ago

This is not a single-round game. The financial markets represent effectively an infinite game (in game theory jargon), where you assume that the operation isn't closing today. Therefore, you have to consider both the short-term effects and the long-term effects. Short-term this is good for FB but long-term this is terrible (have to give more equity to attract people, you can't borrow as much against your shares, etc.)

ChuckMcM 14y ago

Well in the valley its hard to use stock incentive stock options as a lure if the stock price is going down. That can force you into giving out stock grants and those have their own set of annoyances. If your stock is going down you are less able to raise capital by doing a private placement (basically a pre-planned sale to fixed investors kind of like Zynga did and is currently being sued for) Anytime a company sells a large amount of stock, and then the stock continues to go down, a number of law firms will file lawsuits. Perhaps most importantly your 'buying power' is reduced. If you notice there are a lot of 'acquihires' going around. Those can be done 'all stock' when the stock is strong but require 'cash and stock' or worse 'all cash' when the stock is weak. So if Facebook wants to continue to gobble up things like Instagram is can't go into a deal with "Hey, its a billion dollars, uh today, perhaps on Friday it will be 800 million." [1] [1] Yes, I know its more complicated than that but I simplify for brevity.

tedsuo 14y ago
Thanks, that was succinct and informative.

gscott 14y ago

If it gets low enough, they can just buy the remaining stock, go private again, find new revenue sources, then go IPO again. This may be the plan. Any normal CEO would be out their detailing future plans, like launching in new countries, new revenue initiatives, etc.

megablast 14y ago
That would not look good. I think everybody sees the value in facebook in the tech world, for all the data they have, but the general public does not.
- z92 14y ago
  That would not be good for the general public. But probably will be a good strategy for FB-the-company if stock values go down. That will make it look like a cycle of cashing the over hype.

MyNewAccount99 14y ago

why did facebook need all that money from the IPO anyway?

leothekim 14y ago
Not clear that they needed the IPO money. I think they had to have an IPO due to SEC regulations. http://www.pehub.com/146588/the-%E2%80%9Cfacebook-problem%E2%80%9D-secondary-market-trading-and-the-500-shareholder-rule-part-2-of-a-4-part-series-on-the-jobs-act/ http://www.pehub.com/146588/the-%E2%80%9Cfacebook-problem%E2...
ramblerman 14y ago
As a private company there is a 500 shareholder limit. This made it difficult to use stocks to 'incentivize' employees. The second argument I've heard is that it allowed Zuckerberg and some of his closer companions to cash out a large chunk of cash for the first time. Facebook itself did not need money to my knowledge

zeroonetwothree 14y ago

If their stock is perceived as stagnant or declining, it makes it harder to attract top employees (and retain existing employees). It also hurts the morale of all the employees that started working in the past ~12 months, whose equity was valued at an amount higher than $20.

jonnathanson 14y ago

The perception that they're overvalued, or poorly managed, or what have you, hurts their ability to sell big advertisers on big-ticket advertising deals. These have been their bread and butter all along. Over the last few years, many Fortune 500 companies signed $20MM+ yearly deals to advertise on Facebook, develop fan pages, etc. Some -- most infamously, GM -- are starting to pull back (or pull out altogether). In very basic terms, Facebook makes the majority of its money from advertising. It makes the majority of its advertising money from a relatively small handful of very big advertisers. Shaken confidence in Facebook, for whatever reason, shakes the confidence of these advertisers, which jeopardizes Facebook's ability to make money. All of this is leaving aside the financial damages associated with declining market cap. In a weird way, that's actually less relevant than the effect the busted IPO is having on Facebook's position in the ad sales business.