IPOs, Initial Public Offerings: pre & post IPO

Facebook (FB)

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Facebook conference call with Rob Enderle here May 16th

May 15, GM stops FB advertising & Ford responds

Update:  Monday, May 14

  • FB’s price range upped to $34-$38
  • $100 billion market capitalization at price range mid-point
  • Happy Birthday Mark…
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Added Monday, May 14:  4 summary comments

Earlier comments:

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Based in Menlo Park, California, Facebook (FB) scheduled a $10.6 billion IPO with a market capitalization of $89 billion at a price range mid-point of $31.50 for Friday, May 18, 2012.

SUMMARY
Facebook is expected to pop on the IPO based on frenzied retail demand.  Some analysts are projecting a per share price of $44 soon after the IPO.

IPOdesktop acknowledges a $44 price could occur.  However, our six to nine month projection is $18, based on assumptions discussed below.

—————————————–
Incoming question:  “So you’re saying only buy Facebook when the price come down to $18?”

Answer:  No, not at all.  I’m saying that over time if Facebook doesn’t hit it’s numbers, and I don’t think they will, that given the upcoming supply of stock that institutional buyers may come to their senses.

It could be like Groupon (down 60% from it’s first day high); like Zynga’s recent performance (down 45% in the last several months), like Pandora, which has been as high as $20 and as low as $8.

If FB hits its numbers or if they get into China and/or if monetize their mobile traffic (I don’t think they can on the scale they need to), then it’s a completely different story, and the long term bulls ‘win’.

It seems to me, however, that the burden of proof is on FB & they aren’t showing good evidence they can solve their strategic mobile problems.

In summary, sure FB could pop to $46 in the first few weeks.  At that level FB is very very risky.  My comments are oriented towards the longer term, six to nine months out.
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MARCH QUARTER RESULTS

  • Revenue growth rate slowing
  • Net profit margin is lowest in seven quarters at 19%
  • Both operating income and net profit are the lowest in six quarters.


DESIGN ISSUES

Facebook is designed for yesterday, not tomorrow.

  • Facebook was designed for the desktop environment, not for the mobile environment.
  • Users don’t have time for ‘Sponsored’ articles in the mobile environment.
  • IPOdesktop expects Facebook’s mobile ad results to be disappointing.


SEASONALITY

  • Facebook blames ‘seasonality’ for the March quarter so-so results.
  • Fast growing technology companies don’t blame ‘seasonality’ for poor quarterly results.
  • Only mature companies rely on ‘seasonality’ excuses.


MOBILE ISSUES

Recent mobile problems are disclosed in the May 9 S-1 filing.

“Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results;”
May 9 S-1, page 5

Facebook started to test ‘sponsored story’ mobile ads in March 2011, over a month after they filed their first S-1.  Two comments:

  • There is a pronounced trend away from the desktop environment towards mobile devices.  Facebook waited until March 2012 to test sponsored stories.  That demonstrates a clear lack of good forward strategic thinking, which reduces the forward price-to-earnings multiple.
  • IPOdesktop believes Facebook’s revenue from mobile devices will be underwhelming, and sooner or later the forward price-earnings multiple will contract, significantly.


PROJECTIONS

  • TCW’s (Trust Company of the West) media analyst projects a 40 percent revenue growth for Facebook this year, and a 33 percent revenue growth next year.
  • 40% growth for 2012 (which IPOdesktop believes is optimistic) followed by 33% growth should  result in a severe price/earnings multiple contraction, compared to the IPO price.


STOCK PLACEMENT

  • Facebook reportedly is trying place 20 to 25% of the IPO in the hands of retail brokerage firms, who typically restrict the ability of IPO buyers to flip the stock.
  • This means the institutions will flip the stock in the first few days, if not the first 10 minutes, into the hands of frenzied retail buyers who are not aware of the above observations.
  • By the time retail buyers have a chance to sell their stock, the wind will probably be out of Facebook’s IPO sails, sadly for the retail buyers who will probably salivate at the first day’s pop.


TAX IMPLICATIONS

There is great uncertainly about tax laws in the U.S.  A large majority of Facebook’s stock is expected to be free to trade in the mid-late November time frame.  IPOdesktop expects the underlying supply of Facebook stock for sale towards year end to be in excess of 2 billion shares, which will without a doubt exert downward price pressure on the stock.

ZYNGA
ZNGA’s recent stock performance is a bad omen for Facebook, because ZNGA contributes most of FB’s non-advertising revenue.   See chart here.

CONCLUSION & VALUATION
Because of the retail feeding frenzy Facebook’s stock is expected to pop in its initial trading.

Over time and that could be six to nine months, IPOdesktop believes Facebook’s true, analytical valuation will be on the order of $50 billion, or 50 times 2011 earnings.  That’s $18 per share.

In summary, Facebook in the initial IPO after market looks like better short than a buy.

Pre-IPO grade-score summary
. Many IPOs in today’s environment are graded C+ and scored 7
. If the pre-IPO grade is below C+ or the score is below 7,
then our analysts may have some concerns about the company’s
outlook and/or its market segment
. If the pre-ipo grade is above C+ or the score is above 7,
then our analysts believe the company’s overall business outlook
is more favorable
Glossary of IPO Analysis terms

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

3

1

C+, 8

QUARTERLY RESULTS

Quarterly results

Dec, ’10

March, ’11

June ’11

Sept ’11

Dec ’11

March ’12

Revenue

$731

$731

$895

$954

$1,131

$1,058

Revenue change over prior qtr

0%

22%

7%

19%

-6%

Ad revenue % of revenue

90%

87%

87%

84%

83%

82%

Gross Margin % of revenue

79%

77%

77%

75%

78%

74%

Operating income

$437

$388

$407

$414

$548

$381

Operating income % of rev

60%

53%

45%

43%

48%

36%

Net income (loss) ($mm)

$251

$233

$240

$227

$302

$205.0

Net income (loss) % of revenue

34%

32%

27%

24%

27%

19%

FINANCIALS

Facebook FB, C+, 8

Post IPO shares: 2818mm

Social networking

March 3 mos ’11

March 3 mos ’12

Menlo Park, CA

2009

2010

2011

2011

2012

IPO Mkt

Revenues ($mm)

$777

$1,974

$3,711

$731

$1,058

Cap (mm)

Ad revenue % of revenue

98%

95%

85%

87%

82%

$88,767

Gross Margin % of revenue

71%

75%

77%

77%

74%

@$31.50

Operating income % of rev

34%

52%

47%

53%

36%

Net income (loss) ($mm)

$229

$606

$1,000

$233

$205

Net income (loss) % of revenue

29%

31%

27%

32%

19%

Quarterly results

Dec, ’10

March, ’11

June ’11

Sept ’11

Dec ’11

March ’12

Revenue

$731

$731

$895

$954

$1,131

$1,058

Revenue change over prior qtr

0%

22%

7%

19%

-6%

Ad revenue % of revenue

90%

87%

87%

84%

83%

82%

Gross Margin % of revenue

79%

77%

77%

75%

78%

74%

Operating income

$437

$388

$407

$414

$548

$381

Operating income % of rev

60%

53%

45%

43%

48%

36%

Net income (loss) ($mm)

$251

$233

$240

$227

$302

$205.0

Net income (loss) % of revenue

34%

32%

27%

24%

27%

19%

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

12 months ended March ’12

Cap (mm)

Sales

Earnings

BookValue*

TangibleBV

in IPO

Facebook (FB)

$88,767

22.2

91

7.9

6.1

12%

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

3

1

C+, 8

*assumes conversion of 680mm option shares

 

 

 

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