Facebook shares now worth about half their IPO price

Shares ofFacebook Inc., the darling of Wall Street just three months ago, have been in a free fall, descending to levels that few thought possible when it made its public debut in May.

With lingering questions about its revenue and profit prospects, shares of the social networking giant dipped below $20 for the first time Thursday, down 47% from its initial public offering price of $38.

The slide began in earnest after the disappointing earnings report last week in which Facebook revealed that costs went up dramatically in the second quarter, far more than what analysts were expecting.

Wedbush Securities analyst Michael Pachter said momentum turned against Facebook after the company also revealed that it intended to increase spending in marketing and sales in order to wring more ad revenue from its 955 million users. That disclosure scared off buyers and offset news that the company had topped sales estimates and met profit targets for the quarter.

“When stocks are going down, sellers are motivated to cut their losses and get out, and buyers are afraid to buy,” Pachter said. “When the momentum is negative, the buyers get spooked. The sellers think, ‘Somebody must know something, so I should get out.’ This is a victim of that. The better question is what caused it to start its decline, and it really was that earnings call.”

At one point Thursday, Facebook shares fell to $19.85. They rallied to close at $20.04, down 4% for the day.

Potential buyers have another cause for concern. The pending expiration of the locked-up status of hundreds of millions of shares — those that Facebook insiders were required to hold on to after the IPO — will probably flood the market with motivated sellers.

Pachter said he believes the upswing at the end of Thursday may have been because the $20 price made the stock attractive to buyers.

“Clearly what the market is telling you is we think their earning power is a lot lower than we thought just eight weeks ago. It’s because of spending,” Pachter said. “When people aren’t certain about what’s going to happen, buyers evaporate. And sellers are faster to sell. If you don’t know what’s going to happen, get out.”

Facebook’s free fall could affect the delicate California state budget. State officials had counted on $1.9 billion of tax revenue from the sale of stock by company insiders. But those projections assumed a share price of $35, which seems almost unimaginable right now.

A report by the state Legislative Analyst’s Office, released Wednesday, said that if the company’s shares do not rebound by the end of the year, “hundreds of millions of dollars of income tax revenue assumed in the state budget plan are at risk.”

Victor Anthony, an analyst with Topeka Capital Markets Inc., said he believes Facebook will eventually find a way to increase revenue from mobile users. People are increasingly using smartphones to log on to the social network.

“My fundamental view is still positive. I see significant value for this business long term,” said Anthony, who has a “buy” rating on Facebook and a target price of $36 by the end of 2013. “If your horizon is long, this may be a good time to buy this stock. If you want to time it, you could wait for it to tick down a little more.”

stuart.pfeifer@latimes.com