It certainly did not take long for Facebook (FB), the biggest IPO in quite some time, to get its first negative press. A lawsuit has already been filed alleging that investment banks Morgan Stanley, Goldman Sachs, and JPMorgan all cut back their revenue forecasts for the social media giant while promoting the company, but only told select investors about the new data. Documents filed in district court in New York state charge that "false and misleading representations and omissions" were made.
Despite the new litigation, there are firms on Wall Street already rating Facebook as a "Buy." Needham & Co. calls Facebook a Buy, citing that the company should be valued based on the revenue potential from total minutes spent on its website by consumers, and that an incredible 14% of the time people across the globe spend online is with Facebook.
Furthermore, the firm sees the potential for $14 billion annually, with $6 billion coming from the United States. This is an impressive number given that Facebook posted $3.7 billion in revenue in 2011. Needham & Co. places a $40 price target on Facebook.
While it would certainly be unfair for investment banks to selectively give out information regarding an IPO, the reality is that many investors jumped on Facebook's IPO simply because it was Facebook. Morgan Stanley claims in The Wall Street Journal that it followed the same procedures it follows for every IPO and that its actions were in compliance with regulations.
Certainly the lawsuit is a negative overhang on Facebook, but that does not mean the company is a dead duck in terms of investment. My strategy would be taking more of a wait-and-see attitude with Facebook. Let some of the dust settle while conducting a more in-depth analysis of the company. Right now there are simply too many wild swings in this equity.
It seems as if some companies that do business with Facebook are now seeing their equity treated better than Facebook itself. Perhaps that is a direction investors can consider. Facebook has a high of about $45 and a low just under $31. The equity is currently trading at the low end of that range.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
