Facebook Inc. received a buy recommendation from Wedbush Securities Inc. and a target price of $44, its first rating since announcing plans to sell shares in a range of $28 to $35 in an initial public offering.
Facebook, owner of the world’s most popular social-networking company, should benefit from its large, growing user base that will help attract more spending by advertisers and boost revenue and earnings, Michael Pachter, an analyst at Wedbush in Los Angeles, said yesterday in a note to investors. Mobile advertising could play an especially important part of the growth in advertising, Pachter said.
“More users should drive more usage, which in turn should drive increased advertising revenue share,” Pachter wrote. “Facebook will capture an increasing percentage of spending on offline advertising, while growing share of online advertising as well, as usage continues to increase and advertisers become more comfortable with the cost-effectiveness of online advertising.”
Pachter rated the shares outperform, the equivalent of a buy. The rating, which is unusual before a company’s initial public offering, could help persuade investors considering Menlo Park, California-based Facebook, which is valuing itself at as much as $96 billion. Still, the earnings potential may not be realized until the middle of this decade as Chief Executive Officer Mark Zuckerberg focuses on the user experience, Pachter said.
“Investors should be prepared to be exceedingly patient,” Pachter said. “Zuckerberg appears committed to the company’s mission of making the world more open and connected, and appears to us to consider revenue generation an afterthought.”
The stock also should be helped by general investor interest, according to Pachter. Recent transactions on the private markets have put the valuation at as much as $44 a share. That indicates demand for Facebook shares should outstrip supply, Pachter said.
Facebook will begin meeting investors next week as part of its road show and is scheduled to price the offering on May 17, data compiled by Bloomberg show. As part of the promotional tour, the company will play up its prospects for advertising, including mobile.
“Mobile is a key area of growth for Facebook,” Chief Operating Officer Sheryl Sandberg said in a video posted May 3 to accompany the investor presentations.
The company makes most of its sales from online advertising for businesses that want to reach a user base of more than 900 million. It began this year to sell marketing messages tailored to mobile devices, part of a push to keep it from losing business to competitors including Twitter Inc. and Google Inc.
The company and its holders plan to sell about 337.4 million shares in the offering. At the high end of the range, the IPO would raise $11.8 billion, making it the largest initial share sale on record for an Internet company.
Also, Facebook would be more costly than every member of the Standard & Poor’s 500 Index relative to earnings except for Amazon.com Inc., Leucadia National Corp. and Equity Residential, according to data compiled by Bloomberg. Facebook would already have a market capitalization about half the size of Google Inc.’s -- even though it has one-10th the sales.
Facebook follows more recent IPOs by fellow Internet companies such as Zynga Inc. and Groupon Inc. Zynga, the maker of Internet games including “FarmVille,” raised $1 billion in its December IPO, while online-coupon provider Groupon raised $805 million, including an overallotment option, in November.
Both stocks are trading below their offering prices.
Zuckerberg’s Tax Bill
Facebook is offering 180 million shares, while existing owners such as Accel Partners and Digital Sky Technologies are selling 157.4 million, according to the filing. Zuckerberg is offering 30.2 million of his 533.8 million shares. The majority of his net proceeds will be used to pay taxes associated with exercising stock options.
Zuckerberg may control about 57 percent of the voting power of Facebook’s outstanding capital stock after the offering, according to the filing. Sandberg, who isn’t selling in the offering, holds 1.9 million shares.