Facebook – investors still divided over value
With Facebook set for its second day of trade on the Nasdaq following its much vaunted debut on Friday (18 May), investors are still divided over whether or not the company offers true value.
Facebook launched into public trading amid high expectations from analysts after a record-breaking IPO run that saw the world’s largest social network comfortably reach its upper-range $38 per share starting price.
However, what resulted from the company’s first day of trading was a lot of disappointment as the stock hit a high of $45 and then fell flat to $38.23 – only 0,61% higher than its IPO price – leaving a lot of people wondering: what went wrong -if anything went wrong at all?
Nasdaq problems
To kick matters off, there was a bit of an issue with the Nasdaq, which due to a reported “software glitch”, had left investors in the dark as to whether their transactions had gone through or not.
The Nasdaq CEO, Robert Greifeld had apologised for the error, telling the Wall Street Journal that “This was not our finest hour,” but insisting that the glitch had not directly affected Facebook’s share price.
However, despite the 30 minute delay in trade, Facebook still managed to start trading at $42.05 before the waning interest hit, forcing underwriters to buy large amounts of Facebook stock to support the initial price.
Sam Hamadeh, CEO of research firm Privco, believes the banks spent around $380 million on Facebook stock, according to the New York Post.
Over-valued, over-hyped
Skeptics have argued all along that a valuation of more than $100 billion — about equivalent to Amazon.com Inc and exceeding that of Hewlett-Packard Co and Dell Inc combined — was far too high for a company that posted $1 billion in profit and $3.7 billion in revenue in 2011.
Gerhard Lampen, head of Sanlam’s online trading platform, Sanlam iTrade, says that growth for Facebook is already matured, and he finds it difficult to see value.
“With a P/E ratio of more than 100, Facebook was already valued expensively, especially as the huge spurt in growth is in the past. It is now a mature IT offering. To justify a 100 P/E growth in profit needs to continue for years in the plus 30% range, which I think will be difficult to achieve,” he told BusinessTech.
He also pointed to media reports highlighting the fact that clicks on advertising was not meeting expectations.
“There was a lot of hype about this huge IPO with 750 million users. Even non-clients here tried to find a way to participate in the IPO. But adding 25% to the already big IPO filled the buying orders of a lot of potential buyers on listing day, hence lead Banker, Morgan Stanley had to buy to keep the price from falling below $38,” he said.
“I think it will go lower soon as many participants in the IPO were looking for a quick buck and will get out quickly if they are staring at losses. The first shock will be when they don’t meet profit expectations,” Lampen concluded.
Good value?
Facebook insiders, as reported by Reuters, have a different view. Because of the structure of Facebook’s IPO, money was directly injected into the company, leaving less to be lapped up by the bankers.
Facebook’s underwriters took a 1% commission on the IPO, as opposed to the convention of 7% which is typically seen.
“You want to price the offering correctly. Institutional buyers get a little bump and the company raises the right amount of money,” said Kevin Hartz, co-founder and CEO of Eventbrite, an online ticketing startup that is integrated with Facebook’s platform.
“If the stock has a massive bump on day one, that means you misread market demand and the company could have raised more money with the same amount of dilution, or could have raised the same amount of money with less dilution.”
Speaking to TechCrunch, Dan Scholnick, a General Partner at Trinity Ventures, echoed Hartz’ notion of Facebook’s value – emphasising that the best investments, are those that are determined over months and years.
“Anyone investing in an IPO (or a private company for that matter) looking for a “pop” is trying to predict short term market behavior. That’s just fine, but it’s a high class form of gambling,” he said.
“Investing is risky business, particularly when it’s based on factors that are impossible to understand. I’m guessing that many of those IPO investors are bullish on Facebook’s future. Any company that controls online distribution for nine hundred million people and counting has got to be pretty valuable. I’d put my money on that,” he concluded.
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