Facebook Analysts See Shares Staying Less Than $38 IPO Price

Facebook Analysts See Shares Remaining Less Than IPO Price
The Facebook Inc. logo on monitors during trading at the Nasdaq MarketSite in New York. Photographer: Scott Eells/Bloomberg

Facebook Inc. analysts including those at lead underwriter Morgan Stanley say the social-network operator is worth no more than its debut price of $38.

At least 17 securities firms began coverage of the company today, bringing the average analyst share-price estimate to $37.95, data compiled by Bloomberg show. Morgan Stanley gave Facebook the equivalent of a buy rating, as did JPMorgan Chase & Co., Goldman Sachs Group Inc. and five other firms. There were eight holds and one sell, the data show.

Facebook, its bankers and listing exchange Nasdaq OMX Group Inc. faced criticism after the shares fell below the initial public offering price of $38 on the second day of trading and extended declines to 32 percent on June 5. Underwriters sold stock at a higher valuation than every Standard & Poor’s 500 Index company except two.

“Investors probably have a right to be a little bit upset,” John Kattar, chief investment officer at Eastern Bank Wealth Management in Boston, which manages $1.7 billion, said in a telephone interview. His firm doesn’t own Facebook stock. “The underwriters got a lot of pressure from the company to price it as high as possible. They were getting a lot of pressure from Facebook to try to extract the maximum pricing.”

The stock opened at $42 on Nasdaq on May 18, hours after underwriters sold shares for $38 each from investors and insiders including Chairman and Chief Executive Officer Mark Zuckerberg. They finished the day at $38.23, then tumbled 11 percent to $34.03 on May 21 and closed at $25.87 on June 5. The stock rebounded to $33.10 as of yesterday’s close.

15% Advance

Thanks to the decline since the IPO, the average share-price estimate from firms tracked by Bloomberg implies a 15 percent gain during the next year from yesterday. The compares with the 22 percent average predicted advance for S&P 500 companies, the data show. Facebook fell 2.6 percent to $32.23 today.

“Facebook is uniquely positioned to leverage its large and highly-engaged user base to monetize the mobile Internet,” said Scott Devitt, an analyst at Morgan Stanley, in a research report initiating coverage today. He set a price estimate of $38 and rates the shares overweight.

Firms from Bank of America Corp. to Credit Suisse Group AG and Citigroup Inc. gave Menlo Park, California-based Facebook the equivalent of a hold rating today.

‘Significant’ Prospects

Citigroup’s Mark Mahaney, in a report titled “Easy to ‘Like,’ Hard to Love,” said Facebook’s “significant” long-term prospects are offset by the stock’s valuation and slowing growth in users. He said the company trades for 50 times his estimate of 2013 earnings. The average analyst estimate for profit excluding some items next year is 64 cents, according to data compiled by Bloomberg.

“Super-high multiples and decelerating growth don’t mix well,” Mahaney said.

Before the IPO, on May 9, the company amended its IPO filing to say growth in advertising had failed to keep up with user gains. It then contacted more than 20 analysts, including those at underwriters Morgan Stanley, Goldman Sachs and JPMorgan, to guide them toward the lower end of its second-quarter sales estimate, according to a person with knowledge of the matter.

A day after that filing, the analysts called up some investor clients to communicate their revised estimates for sales and profit, said people with knowledge of the process. The company didn’t give the analysts any materially different information than the updated prospectus, said a person close to the situation.

IPO Price

On the eve of the first day of trading, May 17, Facebook and lead underwriters including Morgan Stanley, Goldman Sachs and JPMorgan Chase met to determine the IPO price, according to people familiar with the matter.

On the conference call, joined by Morgan Stanley Chief Executive Officer James Gorman and Facebook Chief Financial Officer David Ebersman, the company and its lead bankers discussed an IPO price range of $36 to $41 a share, people with knowledge of the matter said. Ebersman’s aim was to maximize the company’s IPO proceeds and to cap the first-day increase at 10 percent, said the people, who asked not to be identified because the talks were private.

JPMorgan bankers indicated they had significant client demand at a price above $38, one person said. The group quickly reached consensus at $38 and discussions were not drawn out, the people said. The shares rose 0.6 percent on the first day of trading.

Daniel Salmon, an analyst at BMO Capital Markets Corp. in New York, initiated coverage with a price target of $25 today and rated Facebook underperform, an equivalent to sell. Facebook’s user growth will slow to 16 percent in 2014 from 22 percent next year, he said.

“With user growth decelerating, pricing power will be required to support the valuation, and we believe this will be a challenge in light of industry-wide declines,” Salmon said.