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Facebook priced at $38 for trading Friday morning.

Listen to the Facebook conference call here, with Rob Enderle. The conference call was initially released just for subscribers, who registered for the conference call, which was Wednesday, May 16th.

What follows is series of updates posted for our subscribers.

May 17th update
A word to retail investors, get out ASAP if you get stock on the offering.

Retail after market demand will be like an incoming tsunami and then it will recede fairly quickly to much lower levels.

At the recently increased size 57% of the IPO proceeds will go to selling shareholders, almost $10 billion. That's huge, it's never happened before and never will happen again. Those selling shareholders are stampeding towards the exit.

At the increased size and increased price range mid-point point ($15 billion) FB is the biggest pump and dump ever. Shortly down the road retail investors in the aftermarket won't know what hit them.

Note: We expect that GM's abandoning Facebook will tend to freeze future ad sales increases from big advertisers. The big advertisers will want to study FB's ad effectiveness in more detail. So FB can kiss goodbye sequential quarterly ad revenue increases in the near term.

May 15th update
Four overall comments:
(1) Facebook's growth
The growth rate is declining because Facebook is essentially a legacy application designed for desktop real estate. It's a fish out of water in the mobile platform in terms of generating ad revenue.

'Sponsored links' have been around forever and they are no silver bullet for Facebook. Mobile users are too focused on their own activities (like walking and talking at the same time, etc) to bother clicking through mobile-sponsored links.

In short, I think FB is backing itself into a corner regarding revenue from mobile, but they don't really have a choice, it seems to me.

(2) Zuckerberg's leadership
His friction with Wall Street has been especially noticeable during the road show. He's showing his rebellious side, which is good if he's in a rock group, not so good as CEO of a major company.

As a result the Wall Street crowd isn't going to give him much future leeway, it seems to me.

Also, I always thought he would set the price at $100bb regardless of any advice he received because FB has been touting the $100 bb valuation for a year, regardless of quarterly non-performance. And sure enough, that's the birthday present he gave himself Thursday by setting the price range midpoint of $36. It's amazing what you can do for yourself if you control 59% of a company after the IPO.

The 'birthday present' is in the same category as dressing like a back-room coder when presenting to powerful Wall Street investors and analysts, which is another way of saying 'stick it in your ear' to Wall Street - not very smart. Well, that's another black eye he gave himself as far as a fairly large group of Wall Street professionals are concerned, seems to me. Over time they are not going to cut him any slack, especially when he needs it.

Regarding M. Zuckerberg as a product development genius...I don't think so. If he is such a product genius then why in the world did he wait for five or six weeks after filing the S-1 on February 1 to start testing his mobile app?

That one screw-up is all you need to know about Facebook's vision for the future...which is why they don't have a defensible up-to-date vision for the future.

(3) Should you buy FB?
Only if you can flip it right away. I think Facebook has loaded up the retail channel (Schwab, Etrade, Fidelity, etc) with stock. Most of those retail houses have 15 to 30 day holds, so FB and the investment bankers are trying to limit to float to ensure a near-term pop.

So the institutions can get out ASAP in spite of what some of them are saying. However, FB has been taking a lot of negative hits since it filed, and that may have filtered into the retail side. So hopefully there is some education out there that will help limit the retail losses from the uninitiated buyers in the first week or so.

And there's no reason to think Facebook stock performance will be any different than all the other social media stocks, most of which never saw their first day (first hour's) pop again.

(4) Top themes to note about the FB IPO
A legacy desktop application that doesn't work for advertisers on the mobile platform.

FB will have an artificially low float initially, but we expect 2 billion shares to be available six months out. It makes sense for everyone who owns the stock now to sell 100% of their holdings this year because of tax law uncertainty and because in six months it will be obvious that FB's 'trust me' mantra of today won't have worked.

I think FB missed their December quarter estimates, missed their March quarter estimates and will miss their June quarter estimates -- once Wall Street has internalized that fact the price/earnings multiple will undergo a severe contraction. Zuckerberg's friction with Wall Street will come back to haunt him. He just doesn't know what he doesn't know.

And a favorite saying of a friend of mine is, 'If you don't get in touch with reality it WILL get in touch with you.' But then again if you're worth $20 billion the way Mark is, he'll never have to get in touch with reality again.

CONCLUSION
FB has a very good chance of trading in the $18 range within a six to nine month time frame.

Update: May 14, 2012

  • FB's price range upped to $34-$38.
  • $100 billion market capitalization at price range mid-point.
  • Happy Birthday Mark.

Updated IPO Report, May 11th
Based in Menlo Park, California, Facebook scheduled a $10.6 billion IPO with a market capitalization of $89 billion at a price range mid-point of $31.50 for Friday, May 18, 2012.

SUMMARY
Facebook is expected to pop on the IPO based on frenzied retail demand. Some analysts are projecting a per share price of $44 soon after the IPO.

We acknowledge a $44 price could occur. However, our six to nine month projection is $18, based on assumptions discussed below.

Incoming question: "So you're saying only buy Facebook when the price come down to $18?"

Answer: No, not at all. I'm saying that over time if Facebook doesn't hit its numbers, and I don't think they will, that given the upcoming supply of stock that institutional buyers may come to their senses.

It could be like Groupon (NASDAQ:GRPN) (down 60% from its first day high); like Zynga's (NASDAQ:ZNGA) recent performance (down 45% in the last several months), like Pandora (NYSE:P), which has been as high as $20 and as low as $8.

If FB hits its numbers or if they get into China and/or if monetize their mobile traffic (I don't think they can on the scale they need to), then it's a completely different story, and the long term bulls 'win'.

It seems to me, however, that the burden of proof is on FB and they aren't showing good evidence they can solve their strategic mobile problems. In summary, sure FB could pop to $44-46 in the first few days. At that level FB is very very risky.

MARCH QUARTER RESULTS

  • Revenue growth rate slowing
  • Net profit margin is lowest in seven quarters at 19%
  • Both operating income and net profit are the lowest in six quarters.

DESIGN ISSUES
Facebook is designed for yesterday, not tomorrow.

  • Facebook was designed for the desktop environment, not for the mobile environment.
  • Users don't have time for 'Sponsored' articles in the mobile environment.
  • We expect Facebook's mobile ad results to be disappointing.

SEASONALITY

  • Facebook blames 'seasonality' for the March quarter so-so results
  • Fast growing technology companies don't blame 'seasonality' for poor quarterly results
  • Only mature companies rely on 'seasonality' excuses.

MOBILE ISSUES
Recently disclosed mobile problems are disclosed in the May 9 S-1 filing

"Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results;"
May 9 S-1, page 5

Facebook started to test 'sponsored story' mobile ads in March 2011, over a month after they filed their first S-1. Two comments.
(1) There is a pronounced trend away from the desktop environment towards mobile devices. Facebook waited until March 2012 to test sponsored stories. That demonstrates a clear lack of good forward strategic thinking, which reduces the forward price-to-earnings multiple.
(2) We believe Facebook's revenue from mobile devices will be underwhelming, and sooner or later the forward price-earnings multiple will contract, significantly.

ZYNGA
ZNGA's recent stock performance is a bad omen for Facebook, because ZNGA contributes most of FB's non-advertising revenue. See chart here.

PROJECTIONS

  • TCW's (Trust Company of the West) media analyst projects a 40 percent revenue growth for Facebook this year, and a 33 percent revenue growth next year...read more
  • 40% growth for 2012 (which we believe is optimistic) followed by 33% growth should result in a severe price/earnings multiple contraction, compared to the IPO price.

STOCK PLACEMENT
Facebook reportedly is trying place 20 to 25% of the IPO in the hands of retail brokerage firms, who typically restrict the ability of IPO buyers to flip the stock.

We believe the final percentage allocated to the retail channel will be higher. That would be a strategic decision on the part of both Facebook and the banking team, to reduce the immediate trading float.

We expect institutions will flip the stock in the first few days, if not the first 10 minutes, into the hands of frenzied retail buyers who are not aware of the observations above.

By the time retail buyers have a chance to sell their stock, the wind will probably be out of Facebook's IPO sails, sadly for the retail buyers who will probably salivate at the first day's pop.

TAX IMPLICATIONS
There is great uncertainly about tax laws in the U.S. A large majority of Facebook's stock is expected to be free to trade in the mid-late November time frame. We expect the underlying supply of Facebook stock for sale towards year end to be in excess of 2 billion shares, which will without a doubt exert downward price pressure on the stock.

CONCLUSION & VALUATION
Because of the retail feeding frenzy Facebook's stock is expected to pop in its initial trading.

Over time and that could be six to nine months, we believe Facebook's true, analytical valuation will be on the order of $50 billion, or 50 times 2011 earnings. That's $18 per share. In summary, Facebook in the initial IPO after market looks like better short than a buy.

Pre-IPO grade-score summary
. Many IPOs in today's environment are graded C+ and scored 7
. If the pre-IPO grade is below C+ or the score is below 7,
then our analysts may have some concerns about the company's
outlook and/or its market segment
. If the pre-ipo grade is above C+ or the score is above 7,
then our analysts believe the company's overall business outlook
is more favorable
Glossary of IPO Analysis terms

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

3

1

C+, 8

QUARTERLY RESULTS

Quarterly results

Dec, '10

March, '11

June '11

Sept '11

Dec '11

March '12

Revenue

$731

$731

$895

$954

$1,131

$1,058

Revenue change over prior qtr

0%

22%

7%

19%

-6%

Ad revenue % of revenue

90%

87%

87%

84%

83%

82%

Gross Margin % of revenue

79%

77%

77%

75%

78%

74%

Operating income

$437

$388

$407

$414

$548

$381

Operating income % of rev

60%

53%

45%

43%

48%

36%

Net income (loss) ($mm)

$251

$233

$240

$227

$302

$205.0

Net income (loss) % of revenue

34%

32%

27%

24%

27%

19%

FINANCIALS

FacebookFB, C+, 8

Post IPO shares: 2818mm

Social networking

March 3 mos '11

March 3 mos '12

Menlo Park, CA

2009

2010

2011

2011

2012

IPO Mkt

Revenues ($mm)

$777

$1,974

$3,711

$731

$1,058

Cap (NYSE:MM)

Ad revenue % of revenue

98%

95%

85%

87%

82%

$88,767

Gross Margin % of revenue

71%

75%

77%

77%

74%

@$31.50

Operating income % of rev

34%

52%

47%

53%

36%

Net income (loss) ($mm)

$229

$606

$1,000

$233

$205

Net income (loss) % of revenue

29%

31%

27%

32%

19%

Quarterly results

Dec, '10

March, '11

June '11

Sept '11

Dec '11

March '12

Revenue

$731

$731

$895

$954

$1,131

$1,058

Revenue change over prior qtr

0%

22%

7%

19%

-6%

Ad revenue % of revenue

90%

87%

87%

84%

83%

82%

Gross Margin % of revenue

79%

77%

77%

75%

78%

74%

Operating income

$437

$388

$407

$414

$548

$381

Operating income % of rev

60%

53%

45%

43%

48%

36%

Net income (loss) ($mm)

$251

$233

$240

$227

$302

$205.0

Net income (loss) % of revenue

34%

32%

27%

24%

27%

19%

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

12 months ended March '12

Cap

Sales

Earnings

BookValue*

TangibleBV

in IPO

Facebook

$88,767

22.2

91

7.9

6.1

12%

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

3

1

C+, 8

*assumes conversion of 680mm option shares

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: IPO Preview: Facebook