Waiting for Facebook to hit IPO price again? Keep waiting

Social-media enthusiasts with eyes on the stock market bought into Facebook's initial public offering May 18. Now those who clung to the stock are wondering: When will shares of Facebook climb back to their IPO price of $38 a share?

My answer: About 32 quarters -- or eight years.

Here's why:

I did an analysis August 1, when Facebook closed at $20.88 a share. That's right about where the stock is currently trading. This puts Facebook's price-to-earnings ratio based on the last 12 months (LTM) earnings at 72.4.

I compared this to the median P/E -- also based on the last 12 months of earnings -- of Apple, Yahoo, Microsoft, Google, and LinkedIn, a composite of tech leaders. Apple and Google have proven revenue-growth stories, and LinkedIn (like Facebook) is a newcomer as a reference point. Like Facebook, Yahoo has a huge user base and struggles with the amount of revenue it makes off each user. For this composite of tech leaders, the median P/E ratio is 18. So let's use a P/E of 18 as a benchmark.

That's when I arrived at our first piece of sobering news: If Facebook were valued comparably to this group on a P/E basis, its stock would be $5.22 a share, not $20.88.

• Facebook's earnings-per-share will grow at 26.2 percent per year, which is the projection from Capital IQ.
• Profit margins stay where they are.

Assuming those two things happen, for Facebook to get its sales and earnings at a level that justifies a $38 stock, it will take 32 quarters, or eight years.

The math is simple: Facebook needs to increase its current earnings per share of 29 cents to $2.11, a more than sevenfold jump. And it would need the same sort of annual revenue boost, from $4.3 billion to $31.3 billion. If it pulls that off, our stock price of $5.22 (based on that 18 P/E) returns to $38 ($5.22 x 7.28).

Let's look at a key metric, Facebook's average revenue per user, or ARPU. As of the latest quarter, Facebook's ARPU was $1.28 in the last quarter. Annualized, that would be $5.12, a penny increase from the ARPU of $5.11 it reported at the end of 2011.

But to meet the $31-plus billion in annualized revenue, the company would either need to have 6.1 billion users at the current ARPU, or make a lot more money off each user -- theoretically increasing ARPU to $33.15. More realistic would be a combination of an increase in ARPU, plus an increase in users to meet that $31.3 billion mark.

What does this mean for Facebook and its investors? While the U.S. economy is facing a possible fiscal cliff, Facebook is facing a tsunami. Here's why:

• Facebook's ARPU does not come remotely close to supporting the company's current enterprise value.
• Management has not demonstrated that it can increase ARPU; it has clearly shown it can increase users. Facebook now has more than 950 million users, with 543 million of them "daily active users." This is impressive, but Facebook has yet to figure out a way to capitalize on its enormous fan base.
• Lockups will start coming off shares held by pre-IPO shareholders, including employees, later this month. Many of these stockholders are not yet millionaires in liquid assets and will want to cash in (even if the stock has fallen so much, they may have received their locked-up shares at a price far below $20). This should put more pressure on share price. Locked-up shares become available for trading on the following schedule: 271 million on August 16; 249 million on October 15; 1.32 billion on November 14; 49 million on December 14; and 47 million on May 13, 2013.
• Zynga, which accounted for 14 percent of Facebook's revenue in the first half of 2012, missed its revenue forecast in its latest earnings report. Zynga CEO Mark Pincus said that the reduction in user engagement and revenue bookings were due to changes made by Facebook. In Facebook's own earnings call, it offered no insight into how it will replace the lost Zynga revenue.
• Nearly one-fifth of Facebook's 543 million mobile users access Facebook exclusively from a mobile device. By Facebook's own admission, its mobile ad strategy is nascent.

Moreover, Facebook has yet to deliver a specific plan and timeline to generate more revenue. Some possible reasons for this glaring omission:

• Facebook is not an e-commerce company, and thus is at a disadvantage in the monetization game.
• Segmentation and localization are key trends in the social-media industry. People may be prone to choosing a social-media platform based on their geographic location or on a platform's ability to connect a specific audience. I was just in China, for example, and found many Chinese people prefer renren, the Chinese equivalent to Facebook. While Facebook will have the largest global market share, there are going to be social-media platforms that are preferred based on geography, or user market segments like LinkedIn for business professionals.

In its first report as a public company, Facebook met earnings estimates and even eked out slightly better than expected revenue of $1.83 billion. But that is not nearly enough given high expectations, its still sky-high valuation, and how far the share price has fallen since the IPO.

With what can only be called lackluster revenue performance, the company has probably set up the perfect storm for its share price to continue to drop.

And this probably explains why defections of key Facebook employees have started. This is not surprising given these are talented people whose restricted stock could be underwater.

So, far from being a rocket-ship startup, Facebook is now a struggling company in need of a turnaround. That's right, a turnaround. And Wall Street's likely next question: Does Facebook have the right management team to pull off a turnaround?

We know that Mark Zuckerberg has been brilliant in building the world's most popular social network. And we know that Sheryl Sandberg has provided a proven, steady hand on the wheel during Facebook's juggernaut phase. But neither executive has been tested in truly tough times, and that's the test they find themselves facing.

Disclosure: Marty Wolf owns shares of Apple and Yahoo.