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Title: Facebook Flops: Look Out Below!
Source:
Barron's
URL Source: http://online.barrons.com/article/S ... 435718852.html?mod=BOL_hpp_mag
Published: May 19, 2012
Author: By ANDREW BARY
Post Date: 2012-05-20 11:03:06 by We The People
Keywords: None
Views: 1115
Comments: 2
After all the hype and anticipation, Facebook's initial public offering turned out to be a disappointment that may bode poorly for investors in the company's richly priced shares. Facebook (ticker: FB) sold 421 million shares Thursday at $38 after bumping up the price range from the original $28 to $35 per share. The stock began trading above $42 Friday morning and came under pressure in the afternoon, spending much of the final half hour just above $38 before finishing at $38.23. (The stock traded as high as $44 in the private market in March.) Without reported support from the deal underwriters, the shares might have fallen below $38 in what would have been a big embarrassment for Facebook and Wall Street. Zuckerberg kicks off trading. The big question is whether the underwriters will continue to support the stock this week. (More on Facebook's debut with small investors, at barrons.com.) Many figured that Facebook would trade at $45 or higher given that the deal was said to be hugely oversubscribed. Yet "oversubscribed" deals aren't always winners. Many institutional investors seek allocations of supposedly hot IPOs because they want to make money, not because they want to own the stocks. Access to hot IPOs is one way Wall Street rewards profitable clients. If the deals don't trade well initially, institutions often sell quickly to lock in whatever profits they can. That might have been the case Friday as Facebook trading volume was heavy at 574 million shares—21.4% of the Nasdaq composite's total volume. It may turn out that Facebook ends up fizzling like General Motors (GM), which went public in a highly touted IPO in November 2010 at $33 and now trades at $21. The lack of a big "pop" in Facebook prompted a sell-off Friday in social-networking stocks like Zynga (ZNGA), Groupon (GRPN), and LinkedIn (LNKD) and contributed to an afternoon decline in the major averages. Facebook probably won't come close to matching the long-term gains of these tech winners. Barron's has been skeptical on Facebook, including an article last week ("Mad About Facebook!"). The shares still look overpriced based on profits and sales, especially given the company's challenges in generating revenue from mobile users and doubts about the effectiveness of brand advertising on Facebook, which were highlighted by General Motors' decision to stop using the site for such ads. Then there is slowing revenue growth, with first-quarter sales dropping below fourth-quarter levels. "It's exceedingly dangerous to pay a $100 billion valuation for a company that hasn't figured out a way to make money," says Aswath Damodaran, a professor at Stern Business School at New York University who has written critically online about the company and its corporate governance. He contrasts Facebook with Google (GOOG), which has a clear model based on online-search advertising. "Facebook doesn't have an impossible valuation, but the odds don't seem in its favor now," Damodaran says. Here's what one veteran tech investor had to say Friday: "Like most IPOs in tech land, Facebook is geared toward enriching early investors and employees while sticking public investors with shares burdened with poor voting rights and high growth expectations." At $38, Facebook trades for 76 times projected 2012 profits of 50 cents a share and 89 times 2011 earnings. Online-search powerhouse Google looks like a much better value, trading at $600, or 14 times estimated 2012 profits. As we wrote last week, Facebook shares probably discount a tripling in annual revenue, to $15 billion, in three years. It might have to reach $35 billion in revenue to produce a double in its shares. At $15 billion in sales, Facebook could earn $1.50 per share, assuming 40%-plus margins; at $30 billion in revenue, profits could total $3 per share. The IPO amounts to a huge score for CEO Mark Zuckerberg, who seemed to get everything he wanted: a $100-plus billion market value, a personal net worth of nearly $20 billion and complete control. Early investors were eager sellers, accounting for 57% of the deal. Investors, beware. There could be an enormous amount of stock for sale between now and year-end, when capital-gains taxes may rise, because lock-up restrictions on 1.8 billion shares expire between August and November. Existing holders paid an average of just $1 per share. Heavy sales could pressure the stock. "Facebook is brazen about the fact that they don't see any need for input from stockholders. In effect, they want my money but don't want me to have any say in how the company is run," Damodaran wrote earlier his year. It's one thing to give such control to Warren Buffett, who has earned it over nearly 50 years at the helm of Berkshire Hathaway. It's another to give unlimited power to a 28-year-old who has built an impressive business with over 900 million users worldwide, but hasn't demonstrated yet the skills to run and profitably expand a major public company. Facebook trades at a much higher price/earnings ratio than either Google or Apple and also has a higher price/sales ratio. Price '12E '12E '12E How Will Facebook Measure Up?
IPO Price/ 1st Day Price One Recent Tech IPO/Ticker Year Close Yr Later Price Microsoft/MSFT $0.07/1986 $0.90 $0.26 $29.27 Cisco Sys/CSCO 0.06/1990 0.08 0.20 16.47 Yahoo!/YHOO 0.54/1996 1.38 1.43 15.42 Amazon.com/AMZN 1.50/1997 1.96 7.63 213.85 eBay/EBAY 0.75/1998 1.97 17.28 38.36 Google/GOOG 85.00/2004 100.34 279.99 600.40 All prices adjusted for stock splits. Source: Bloomberg Rich Price
Company/Ticker Recent
EPS
P/E
Rev
Mkt Val (bil) Net Cash (bil) Facebook/FB $38.23 $0.50 76 $5.2 $105 $10.0 Google/GOOG 600.40 43.42 14 35.5 198 44.7 Apple/AAPL 530.38 46.99 11 162.4 496 110.2 E=Estimate. Source: Thomson Reuters
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#1. To: We The People (#0)
. We thought about participating in this IPO until we looked at the NUMBERS. In fact we aren't even able to be sure that we have all of the correct numbers even after the IPO disclosures. It comes down to THIS simple question and challenge, HOW exactly does facebook MAKE MONEY? So far, there are no REAL answers to that simple question. There are several IDEAS, but none of them are proven with a track record. This IPO is a straight up gamble for the average investor. I'd go to Vegas instead to play craps, it's a safer bet and better "investment". Not to mention the free cocktails and comped meals and suites and such.
#2. To: Mad Dog (#1)
Facebook is also having trouble figuring out how to get the ads it promotes to mobile users. Many people today post from their smartphones. It can't yet get its revenue producing ads to all those consumers.
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