Why Facebook's IPO feels a little ‘like 1999’
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“I give them a honeymoon period,” said Iron fire Capital LLC president Eric Jackson. “I think the stock is going to go up quite a bit and stay there for some time, but after that, the rubber will hit the road.”
He said the challenge for Facebook, founded in a Harvard dorm room in 2004, is to translate its success on the desktop to smartphones, tablets and other mobile devices, which outstripped global PC shipments last year.
While roughly 500 million of Facebook’s more than 900 million monthly users log on to the social networking website via mobile handsets, the company in its IPO filings disclosed that “we do not currently directly generate revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.”
“Facebook doesn’t have a very good story to tell about mobile,” said Aapo Markkanen, senior analyst for consumer mobility at ABI Research.
“It’s true that more and more of its users are accessing it from mobile phones, but at the same time Facebook hasn’t really figured out how to monetize them.”
Facebook chief operating officer Sheryl Sandberg in a video posted Friday for prospective investors said the mobile market is a focus for the Menlo Park, Ca.-based company, which has reportedly dedicated a team to devise a mobile strategy.
Facebook says it will begin showing advertising to users on devices before the IPO, with analysts suggesting the firm will pursue a messaging-based strategy that encourages members to recommend and share advertisers across the Facebook network.
Chief financial officer David Ebersman added that the company would continue to invest heavily in mobile, even if “monetization is uncertain.”
“Maybe they can pull it off with extremely targeted advertising,” Jackson said. He noted Facebook could use a tiny fraction of the proceeds from its IPO to acquire a smartphone company such as Canada’s struggling Research In Motion Ltd. to accelerate its mobile push.
After months of anticipation Facebook on Thursday put a price tag on the most celebrated tech IPO since Google Inc.’s successful debut in 2004, saying it will offer 337,415,352 class A shares on the Nasdaq for between $28 (U.S.) and $35.
At the midpoint of the range, the social networking company is on track to raise $10.6 billion in a debut that could value Facebook at $86 billion.
The range would value Facebook well below the $100 billion analysts had forecast but 91 times its forecast 2012 earnings. That implies an annual growth rate of nearly 40 per cent would be needed to justify the share price based on the multiple typically used to value stocks.
The lower-than-expected valuation follows Facebook’s first-quarter earnings report that showed a 45 per cent increase in revenue to more than $1.1 billion, along with a 12 per cent profit decline as it warned that growth in its user base will inevitably slow.
The report stoked fears that Facebook shares may be overpriced, especially given that Google’s first quarter-over-quarter revenue decline occurred four years after its IPO.
Still, analysts say pent up demand for Facebook stock means there will be no shortage of investors willing to pay up to $35 for shares that one trader said could double within days of the IPO.
Investment banks have first bid on the majority of pre-IPO stock, though Wall Street executives estimate the retail share available to individuals could be as much as 20 to 25 per cent of the offering.
“I have not seen as broad-based interest in an IPO since Google. Investor demand is immense,” said Scott Sweet of research firm IPO Boutique.
“I expect a road show that will rival all road shows where investors will be turned away at the door.”
Facebook executives met Friday in New York with the sales forces of its banks to brief them on the IPO presentation, with institutional investors queuing up to hear the road show sales pitch.
Facebook on Monday will launch its stock marketing campaign, with senior executives including co-founder Mark Zuckerberg pitching the company’s strategy to a list of institutional investors in cities including New York, Boston and San Francisco. A cadre of 33 underwriters led by investment banks including Morgan Stanley, JPMorgan and Goldman Sachs has been assembled to support the IPO.
“You can really feel the excitement,” NYSE floor trader Steve Grasso told CNBC. “The Street is humming with anticipation. I think the stock could double – it could be crazy. There’s that much buzz that people are going to trip over themselves to get in.”
Grasso added that recent declines in shares of companies including Apple Inc. reflect excitement over the Facebook IPO.
“I think institutional investors are selling to make room for Facebook in their portfolios,” he said, adding Facebook will also have a war chest for acquisitions which could boost tech stock values across the board.
Mike Crofton, CEO of private bank Philadelphia Trust Company, said the buzz surrounding the IPO is “kind of like the technology craze we saw in 1998 to 1999. We’ll see how it trades a couple of weeks out.” He added technology companies including Google, Microsoft, and Intel are valued affordably, and will look even cheaper compared to Facebook.
But Francis Gaskins, president of IPODesktop.com, said investors should be wary of a company pricing its IPO at 91 times profit.
“It seems like what they’re doing is throwing a lot of things in the wild and hoping some things will hit. We don’t know what’s happening in the mobile area, their users have kind of plateaued and they’re growing in areas that don’t have disposable advertising income. This company feels a little bit like 1999. ”