Facebook Analysts Who Shunned Herd Now Look Like Heroes

Analysts who broke away from the herd and told investors to avoid Facebook Inc. (FB), the biggest initial public offering ever by a technology company, are looking like heroes after the stock plunged.

The social networking site lost 19 percent through yesterday to $34.03 after opening at $42 on May 18. That’s consistent with warnings from Richard Greenfield of BTIG LLC and Brian Wieser of Pivotal Research Group LLC, who says the stock will slip as low as $30. It left five firms with bullish calls predicting an average rally of 36 percent and one, Tom Forte of Telsey Advisory Group, saying shares may rise 47 percent to $50.

Sentiment toward the offering worsened yesterday after Facebook fell below the $38 price set by underwriters, burning investors who speculated the Menlo Park, California-based company would mimic IPOs such as LinkedIn Corp. (LNKD), which doubled on its first day. While bulls forecast benefits as companies shift advertising to the Internet, Wieser said Facebook’s price is too high and the path to growth unclear.

“There’s always a risk of buying into excessive hype, using rules of thumb for valuation that are divorced from fundamentals,” Wieser, a New York-based analyst at Pivotal, said in a telephone interview yesterday. “There are many things that really speak to the uncertainty investors should be incorporating when they’re thinking about Facebook.”

Analyst Disagreement

The range of price estimates compiled by Bloomberg as of yesterday is wider than normal. At $20, the difference between the lowest and highest is 59 percent of Facebook’s stock price, compared with an average of 36 percent for the companies in the Standard & Poor’s 500 Index. The biggest gap is in Tempe, Arizona-based First Solar Inc. (FSLR), an energy technology provider, at 376 percent of its price, data compiled by Bloomberg show.

The wider gap in analysts’ estimates “reflects uncertainty about a new entity but also that their business model is one that’s in continual development,” Peter Jankovskis, who helps manage about $2.9 billion at Oakbrook Investments in Lisle, Illinois, said in a telephone interview. “They own and have access to a lot of information, but they’re still struggling with finding an effective way of monetizing that information.”

Underwriters led by Morgan Stanley set an IPO price that valued the company at 107 times reported earnings in the last 12 months, more than every S&P 500 (SPX) stock except Seattle-based Amazon.com Inc. (AMZN) and Equity Residential (EQR), a real estate investment trust in Chicago. The valuation made Facebook, co-founded in 2004 by Harvard University student Mark Zuckerberg, the largest technology IPO of all time.

Nasdaq Barometer

The Nasdaq 100 Index, a barometer for the biggest non-financial companies in the U.S., trades for 15.5 times reported earnings, while the S&P 500 has an average valuation of 13.3 times profit, according to data compiled by Bloomberg.

Wieser advises clients to sell and projects Facebook will fall 12 percent. Greenfield, co-head of fundamental equity research at New York-based BTIG, says investors should hold. Five other analysts providing data to Bloomberg rate the stock a buy, with the highest price estimate from Forte, a director at Telsey in New York.

Facebook increased less than 1 percent to $38.23 on May 18 in a day marred by delays, cancellations and mishandled orders. Robert Greifeld, the chief executive officer of New York-based Nasdaq OMX Group Inc., said a “poor design” in software driving IPO auctions caused the mishaps. The shares fell 11 percent to $34.03 yesterday.

Share Swings

LinkedIn, the Mountain View, California-based professional networking website, surged 109 percent in its first day on May 19, 2011. Chicago-based Groupon Inc. (GRPN), the largest online coupon site, rallied 31 percent and Yelp Inc. (YELP), a user-generated review site in San Francisco, climbed 64 percent.

While Facebook’s shares will swing as products are introduced, the company will gain a bigger share of advertisers’ spending as software that targets customers improves, according to Herman Leung, an analyst at Susquehanna International Group in San Francisco.

Facebook has tried to lessen its dependence on advertising by dipping into the payments market, which made up 15 percent of sales last year, data compiled by Bloomberg show.

“Whether it’s on the desktop or mobile, people are spending time on Facebook,” Leung said in a phone interview yesterday. “As analytics start to get better, advertisers will start to massively increase the spend.”

Google Competition

Facebook could make more money from charging advertisers when users click on a video or a song shared by a friend, or “like” a certain brand, he said. The company’s display-advertising growth surpassed that of any other website in 2011, soaring 52 percent, compared with Google Inc. (GOOG)’s 42 percent increase, according to research firm Emarketer Inc. It also had the largest share of that market at 14 percent. Google was in second place with 13.8 percent.

Facebook may trade at an enterprise value of about 30 times its 2013 earnings before interest, taxes, depreciation and amortization, based on an estimated $4.1 billion in Ebitda, said Forte. The company will probably end up with a valuation between Amazon.com, the world’s largest online retailer, and technology companies such as LinkedIn, he said.

“We recognized that this would be a richly valued stock from day one but our view was that there are a handful of other market leaders in their space that are trading at premium valuations,” Forte said in a phone interview. He estimates the stock will climb to $48 or $50 in 12 months. “While it’s been very exciting and chaotic, it’s way too early to determine. Ultimately, we believe this will be a successful stock.”

Operating Expenses

Wieser said there’s no way to tell how much spending advertisers will shift to Facebook. At the same time, operating expenses have increased as the company orients itself to larger marketers and brands. So have capital expenditures, which totaled $606 million last year, compared with $293 million the year before, and acquisitions such as Instagram Inc., which cost Facebook $1 billion.

“The upside is not meaningful enough to validate a buy rating,” Greenfield said in a telephone interview. “Investors should be cautious above $35.”

Facebook’s earnings in the 12 months through March 31 were $974 million, with sales of more than $4 billion, data compiled by Bloomberg show. Revenue may rise 37 percent to $5.1 billion this year, according to the average analyst estimate compiled by Bloomberg. That would be the third straight year of slowing sales growth.

Dwarfed Sale

The initial share sale dwarfed the 2004 IPO of Google, which raised $1.9 billion and valued the company then at about $23 billion. The Mountain View, California-based search-engine operator now has a market value of more than $200 billion.

Sales at Facebook, which makes most of its money from graphically based online ads, totaled $3.71 billion last year. That puts it below the top 50 U.S. technology companies by revenue. Google, with a market value almost twice as high as Facebook, reported $37.9 billion in revenue last year. Google jumped 18 percent on its first day of trading in 2004.

With more than 900 million users, Facebook still faces hurdles in traditional Web advertising. Detroit-based General Motors Co. (GM), the world’s biggest automaker by vehicles sold, said last week it was halting display ads on Facebook, while maintaining brand-promotion pages.

Facebook was the 11th U.S. consumer Internet company to go public in the past year, a stretch that began with LinkedIn. With a valuation of $104.8 billion at the May 18 close, Facebook is worth more than three times the other 10 combined. LinkedIn, a social network for professionals, is second, valued at $10.3 billion.

“It was priced for perfection and we argued that you had to account for more risks,” Wieser said. “It wasn’t surprising to us that the stock is coming back to earth.”

To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net Tom Giles at tgiles5@bloomberg.net

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