Want to better understand the crazy world of technology stocks? That requires having a grasp of something that can best be described as the curse of the ordinary.  What’s more, that curse could mean that Facebook, already down by nearly 50 percent from its offering price to roughly $20, could drop to less than $10, if you consider valuations.  As is often typical in the market for shares in technology companies, the usual stock valuation methods can only take you so far.  Most efforts to value companies rely on guessing the worth of future profits. But the future for technology companies is often less knowable than for firms using traditional approaches to generate earnings in traditional industries.  In times of optimism, that knowledge dearth can actually work to the advantage of technology companies. Executives fill that emptiness with promises of new, paradigm-breaking ways of doing business, while Wall Street analysts follow behind projecting amazing profits. In short, it’s all about being seen as extraordinary.  That has allowed Facebook to go public at a stock price that was 100 times its earnings per share. The belief was that Facebook could entwine advertising into all interactions on its site to generate enormous revenue.  Indeed, each of the companies that have gone public in recent months has needed one main magical story. For Groupon, it was that the company had found a revolutionary marketing tool that was perfect for small businesses. The untapped market was theoretically huge.  But the nightmare begins when investors stop believing in that central story. Earnings don’t have to be terrible, and they haven’t been at Facebook, Groupon and Zynga, the hardest hit. They just have to contain a few clues that the dream won’t be achieved.  Then, the transition from extraordinary to ordinary is brutal.  Groupon is down 75 percent from its initial public offering. The market is now valuing it as if it were any old marketing company; its shares are trading at 13 times the earnings that analysts are projecting for 2013, according to data from Thomson Reuters.  This is a critical time for Facebook.  The faith level in the company is declining, but it may drop further. Right now, the social network is trading at 32 times the earnings that analysts are expecting for 2013. That’s not terribly expensive, but it’s far above Google’s 2013 price-to-earnings ratio of 14 times.  If Facebook traded at 14 times analysts’ 2013 earnings forecast, its shares would be just below $9. Such a fate may seem unthinkable, given how far the stock has already fallen.  But Google’s business is humming right now, and it still only gets a price-to-earnings multiple in the midteens. In its second quarter, the volume of “paid clicks” (the number of times users click on a link that generates revenue for Google) rose 42 percent from the year-earlier period. That’s the fastest growth since 2007, according to Nomura.  Facebook’s defenders say it has a much bigger profit margin than Google’s. But in Google’s main advertising business, the margins may be just as fat, though the company’s numbers make it hard to break this out definitively.  But there’s hope. Some companies have managed to persuade investors to hold on to the dream.  LinkedIn trades at 79 times projected 2013 earnings, a clear sign that the market believes the company has created a revolutionary space for companies to recruit. Amazon.com is extraordinarily talented at projecting itself as extraordinary. Its shares trade at 100 times analyst forecast 2013 earnings, even though it has reported what might look like disappointing earnings for several years. The dream is that Amazon.com is well on its way to dominating Internet commerce, and can look forward to prodigious profits once that happens.  Amazon also shows there’s a way to get investors believing again. Its shares plunged amid fears that it could go bankrupt soon after the dot-com boom of the late-1990s, but in the last 10 years it has regained extraordinary status.  Facebook needs some of that magic fast.
If Facebook wants to bolster its shares, the company will have to persuade investors that the social networking company is extraordinary, not simply ordinary.