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Analysts wonder how low Facebook shares will go

An Apple iPhone displays the Facebook app's splash screen in front of a PC screen.
An Apple iPhone displays the Facebook app's splash screen in front of a PC screen.Karen Bleier / AFP - Getty Images

With its share price hitting new lows daily, professional investors and market experts are beginning to voice concern about the outlook for Facebook stock.

The No. 1 social network’s share price sank even lower Wednesday as nervous investors worried about the company’s long-term business prospects.

Facebook’s share price sank 2.3 percent to a new closing low of $28.19 after dropping nearly 10 percent Tuesday. The share price, which has fallen in five of its eight days of public trading, has now fallen 26 percent since it went public at $38 a share May 17.

Facebook founder and CEO Mark Zuckerberg has seen the value of his stake in the company fall about $5 billion from the IPO value to a current $14.2 billion. Zuckerberg also sold more than $1 billion worth of shares in the IPO, according  to documents filed by the company.

The decline knocked Zuckerberg off a briefly held spot on Bloomberg's runnning index of the 40 richest people in the world.

The offering, which was marred by trading glitches and has triggered several lawsuits, has been one of the worst performing of any large company, according to data tracker Dealogic.

Anant Sundaram, a valuation expert at Dartmouth’s Tuck School of Business, said he’s concerned about Facebook’s stock valuation because he thinks the company will face difficulties deriving revenue from its new users overseas, and from its growing presence on mobile devices.

About 20 percent of the company’s current user base is in the U.S. and Canada, and half of those users are accessing the site using mobile devices, through which Facebook derives much less advertising revenue than through a desktop PC, he said. Facebook rivals Google and Apple currently dominate the mobile arena.

What’s more, markets where Facebook is growing most rapidly -- in Europe and Asia -- bring the company less revenue. Facebook brings in $3 per user in the U.S. and in Canada, but only $1.50 in Europe and just 50 cents in Asia, Sundaram noted.

“You have a situation where U.S.-based PC users are accounting for a lot of your revenue, but if you look at where you’re growing most rapidly that’s where you’re having trouble monetizing your user base,” Sundaram said.

Facebook’s IPO valued the company at $100 billion -- a number that Sundaram says is “problematic” because it implied the company would grow revenue by 30 to 35 percent annually for the next 10 years. According to Sundaram’s calculations, a valuation of $66 billion is more reasonable for Facebook.

“At that valuation for the company we’d be looking at a stock price that’s closer to the low to mid $20s than $40 per share,” said Sundaram, who stressed that he doesn’t make stock purchase recommendations.

“The logic for this is I think the growth rate from 901 million users will flatten out,” he said.

Related: Facebook gets OK to expand its headquarters

A share price in the mid-$20 region is about where buyers and sellers of Facebook options, which began trading Tuesday, are predicting for this summer.

According to The Wall Street Journal, some traders used "put" options to bet that Facebook’s stock price would fall to $25 a share by mid-July.

Analysts have a broad range of price targets for Facebook’s stock, ranging from $30 to as high as $65, according to the newspaper.

Walter Price, a portfolio manager at RCM Capital Management, told CNBC Wednesday that he thinks fair value for Facebook’s shares is about $30, adding that he would buy it at that level.

However, he notes that, apart from the challenge of making money from mobile devices, Facebook -- which relies on advertising for the majority of its revenue -- may find it difficult to lure and keep large advertisers.

“Facebook is in a transition in their business model,” Price told Reuters Insider. “It was easy to get the first 5 to 10 percent of an advertising budget to try it on Facebook and do some brand advertising, but getting the next 5 to 10 percent, you've got to displace TV and that's a lot more difficult to do.

“Facebook still doesn't have the metrics to prove profitability and prove growth and awareness from their platform,” he added.

Days before Facebook’s debut, General Motors announced it was pulling out of paid advertising on the social network, citing Facebook’s unproven track record and concerns about the lack of evidence that advertising on Facebook yielded strong returns.

Facebook’s next moves in the growing mobile arena may also be giving some investors pause.

S&P Capital IQ equity analyst Scott Kessler said Tuesday he has a $30 price target for Facebook over the next 12 months, citing Facebook's still-nascent strategy to earn revenue in the mobile space.

S&P pointed to reports this week that Facebook is looking to both buy browser company Opera Software and build a smartphone, noting that the company will have a hard time making money without proprietary mobile software and hardware.

“We think [Facebook] is at an interesting juncture, as not being more proactive on the mobile front could affect its competitive standing, but being too aggressive could adversely affect its profitability,” Kessler said.

Reuters contributed to this report.