Facebook Misjudged Demand in IPO, Wedbush’s Pachter Says

Facebook Inc. (FB) flooded the market with too many shares amid its initial public offering, according to Wedbush Securities Inc. analyst Michael Pachter.

It was the company’s failure to gauge demand -- and not concern over its growth prospects -- that caused the stock to sink 18 percent in its first two days of trading, Pachter said in an interview with Tom Keene on Bloomberg Radio.

“The market would have probably greedily absorbed $5 billion or $10 billion of stock,” Pachter said. “It’s solely the misjudging of demand.”

Shares of the owner of the largest social-media site rose 3.2 percent to $32 at the close in New York. Facebook, based in Menlo Park, California, began trading on May 18 after raising $16 billion in the largest-ever technology IPO. Just before the IPO, the company boosted the number of shares to be offered by 25 percent to 421.2 million.

The stock would have risen to $45 had Facebook sold fewer shares, Pachter said.

“The guys who bought at $38 freaked out and you saw them puking the stock because they didn’t know why it was going down,” said Pachter, who has an outperform rating on the shares, which he predicts will rise to $44. “There’s nothing fundamentally different about Facebook today from the night they priced it.”

Investors have failed to understand that Facebook’s growth is tied to its ability to get more money from advertisers -- not whether it can attract more users, Pachter said.

Real Growth

“The problem for investors is that nobody really understands how Facebook intends to monetize its user base,” he said. “The real growth is in delivering more relevant ads and charging more for them.”

Investors are overly concerned that Facebook hasn’t made enough progress in mobile advertising and hasn’t won enough users in markets outside North America and Western Europe, Pachter said.

Separately, Needham & Co. analyst Laura Martin today initiated coverage of Facebook and recommended buying the stock.

The company’s earnings growth will track the amount of time users spend on its site, according to Martin. About 14 percent of time Internet users spend online is on Facebook, indicating that its global potential revenue is about $14 billion, she wrote in a research note published today.

The increase in its operating margins -- to 47.3 percent of sales in 2011 -- suggests that its profit will grow faster than revenue, she wrote. Martin estimates the stock will rise to $40.

‘Hoodie Man’

Pachter reiterated his criticism of Facebook Chief Executive Officer Mark Zuckerberg’s clothing choices, saying the 28-year-old’s signature hooded sweatshirt, or hoodie, doesn’t show respect for advertising-decision makers and Wall Street.

“When he turns up in a hoodie he’s saying: I don’t care about you, I care about my users,” Pachter said. “If the users were the people that pay Facebook, then investors and the hoodie-man would be entirely aligned.”

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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