How low can Facebook go?

2012-06-05 08:10

Washington - Two weeks after the largest, most anticipated IPO in years, Facebook shares keep going down. And down. And down. And investors want to know how far they can go.

During trade on Monday the shares hit $26.44, more than 30% below the initial public offering price of $38, before rebounding slightly to $26.90.

"It is difficult to argue for owning the stock today," said Bernstein Research analyst Carlos Kirjner in a research note Monday that added to the selling momentum.

Kirjner forecast a price of $25 over the next 12 months, but added that a real possible slowdown in Facebook revenue growth "will likely drive additional downside pressure on the stock beyond what is already reflected in our price target".

Other critics echoed that.

"There are some real signs that Facebook may be in real trouble and could turn out to be a disastrous investment," said Oliver Pursche, president of Gary Goldberg Financial Services, a New York money manager.

"We told people to stay away because we didn't and still don't know how it was valued," he said.

By far the internet's dominant social network, Facebook went public on May 18 in a $16bn share sale, the second-largest IPO in the United States ever.

The runup to the sale was marked by bubbly enthusiasm reminiscent of the dot-com era, to the extent that lead underwriter Morgan Stanley agreed to raise the offering price and increase the number of shares issued.

But the shares barely held above the $38 level on the opening day and have fallen ever since, delivering real and paper losses of some $4.6bn to the new investors.

Price forecasts are all over the place, from $10 to the upper $40s, as more questions are being raised about the company's real potential to turn an audience of nearly one billion users into an advertising bonanza.

Bernstein Research's $25 estimate takes note of the company's great potential but also its still-unproven ability to fully tap that potential - whether it can make social network-based advertising as effective as, for instance, Google's search-based ads, and if it can do so as fast as many investors expect.

"We do not think it is likely that the issues associated with the effectiveness of social advertising will be addressed, or that upside from new opportunities will become materially clearer in a few quarters," Kirjner said.

"To the contrary, we believe that Facebook's revenue growth over the next 12 months will at best stabilse, and probably further decelerate."

Pursche said the selloff has nothing to do with the darkening clouds over the economic landscape or anything new learned by investors since the IPO.

Nor does it have much to do with the revelation that the underwriters quietly revised downward their forecasts of Facebook's earnings just days before the IPO.

Instead, institutional investors bought expecting an opening day price surge "because it is an exciting company. When that didn't happen, they have been dumping the shares," he said.

"The sentiment is very negative, the technicals are broken."

"Real structural issues" over Facebook's earnings potential aside, Pursche said, fund managers are likely now looking to how their performance and portfolios will look the end of the second quarter, and are selling to minimise the damage.

"If you are a well-known fund manager, you probably don't want Facebook in your top 10 holdings" in the half-year report.

"I wouldn't be shocked if on June 30 it could be trading below $20."

Trip Chowdhry of Global Equities Research called the IPO "totally mispriced".

Valuations are "anywhere from $8 to $50. The price is all over the place," he said. "I think the IPO should have been priced from $10 to $15."

There are optimistic analysts out there, and more are recommending the stock as it falls.

But Pursche and Chowdhry both said the selloff could continue until the company convincingly clears up longstanding questions about its sources of revenue and its business direction.

"There is one thing that Facebook needs to answer," Chowdhry said.

"I think an investor will want to know what percent of current revenues are coming through their current shareholders," which include Microsoft and game maker Zynga.

  • JohncarlosBiza - 2012-06-05 09:00

    The worst investment decision ever for those involved in the IPO. How can you make a mid-term investment(at that price, I'd assume it was so) on a social network.....something that has proven over time to be a periodic boom that matures quickly? MySpace, Mxit rtc. were market leaders just 7 years ago. Facebook has reached/is near its maturity in terms of expansion and will only go downhill in a few years, especially with the perpetual threat of substitite products/new entrants (very soon we may have our operating systems for our mobiles synchronized or something, cutting off the need to log on to Facebook for communication). It also doesn't help that many Facebook users are actually unhappy with the product and its perpetual remodelling and will be fed up in only a matter of time. I have a few friends who have permanently shifted to Twitter or disabled their accounts. Return on investment depends on advertisment, yet as youthful users responsible for the boom mature, they will log on a lot less frequently and thus less adverts revenue. I see this as one of the biggest rip-offs in listing history after a few years.

  • Susan - 2012-06-05 10:13

    No other word for it but GREED....Marc had billions in the bank and it was just not good enough....the universe will take care of this one!!!

  • Willem - 2012-06-05 11:35

    No tablets for stupidity I am afraid. You wanna pay $38.00 for something that aint't worth it or does not actually have the perceived value, your problem. This does not say much for trusting a company like Morgan Stanley to put a "MArket Value" to the share price at the last minute. Good commission for them, I am sure, as for the value, they don't care. They have your money!! This is a SAD public rip off which time will prove - I hope the shareholders sue the Face off their Book. Why the market wants to pay for a social media system that is making a huge contribution towards the destruction of social norms, steals you intellectual property, invades your privacy and sells it off to the most expensive bidder so you can buy more crap.

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