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Why Facebook Needs to do an ‘About-Face’


The year of the mega-tech initial public offering is over.

In the mad-cap, high profile race to win IPO glory, the stakes have gotten more risky, but at what cost?

High-stake tech IPOs seemingly have taken off from out of nowhere.  Pre-2010, the talks in the investment world were of retails and restaurants, now it seems every investment banker is chomping at the bit to take their rightful piece of the super-sized IPO pie; leaving would-be investors and actual small start-up firms out of the rat race.  The IPO market has been inundated with tech companies such as Groupon, LinkedIn, Zynga, Pandora and Zillow (just to name a few); all of which have gone public in 2011 with the expectations of large market share and even larger returns, but instead, they have fallen by the wayside.  Research shows that the majority of social media-related stocks continue to trade below opening-day price.  In fact, 62 percent of all IPOs issued last year are trading lower than their initial-day offer.  Data released from IPOScoop.com show end-of-year total return from prices issued were -3.05 percent compared to 2.84 percent total return for the NASDAQ Composite Index.Slide2
The chart above comprises the aforementioned stocks and the DJIA.  Since mid-year incenception, a growth rate analysis shows that Groupon, LinkedIn, Zynga, Pandora, and Zillow have all performed well below the industrial average.

Hitting below the belt

Shares of Groupon (NASDAQ: GRPN) traded Friday YTD at $19.15 down from its initial offer at $20.00.  That’s however a modest drop compared toits 52-week low of $14.85, a 35 percent plunge in price (with a 52-week high of $31.14).  As of last Thursday, “Research analysts at B. Riley assumed coverage on shares of Groupon” giving the company a “sell” rating, according to news source LocalizedUSA.com.   Other analysts have either given the company a “neutral” rating with a $19.00 price target as early as January 4th or a “hold” rating as late as December 2011.

Recent news for LinkedIn (NYSE: LNKD) indicates that “Shares shorted have increased from 4.51M to 5.23M month-over-month, a change representing 1.67% of the company’s 43.16M share float.”  At last Friday’s trade LinkedIn closed at $70.30 with a 52-week low/high range of $55.98 – $122.70 and an RSI (Relative Strength Index) of $68.33- a bearish indicator.  Disappointing to say the least, considering the $352 million that LinkedIn raked in at the end of its first day of trading and the additional $88 million it raised at close on day two.  Although, not as upsetting as the $700 million that Groupon received for their IPO launch now heading into sell territory, information retrieved from Reuters and Bloomberg.

Unlike the high anticipations of other tech IPOs, Zynga Inc. (NASDAQ: ZNGA) actually faced low expectations from many analysts but Zynga- and its underwriters- felt strong enough to valuate IPO sales at $1 billion (100M shares offered at $10.00).  Unfortunately, it didn’t work out as planned.  Zynga opened at $11 a share “but fell below its IPO price within the first 10 minutes of trading” only to close at $9.50, down 5 percent, according to the WSJ.

After Pandora Media Inc (NYSE: P) went public on June 15,2011, the company’s stockhas only spent a few days out of the past seven months trading at or above its first-day close,” said Forbes.  Pandora’s 52- week low/high range is $9.15- $26.00 with a market cap of 2.04B.  The company is now betting on its future in mobile apps and car radios to boost growth and potentially stock prices as well.

As for Zillow, “In trading on Wednesday, shares of Zillow Inc (NASDAQ: Z) entered into overbought territory, changing hands as high as $26.25 per share.”  It was further noted that, “Investors could look at [this] as a sign that the recent heavy buying is overdue to take a breather, which could bring a pullback in the stock,” according to Market News Video.

Business as usual

While it has become more difficult for companies- that are willing or even able- to make it to opening day because of stringent regulations and large entry fees, the IPO market in general, has fewer companies today entering than before the tech bubble of ‘99.  But, that has not stopped venture capitalists from fronting exorbitant amounts of money into techs even though they are performing badly.

Aarti Shahani, of NPR noted, “About the same number of technology companies went public this year [2011] as last year. Difference is, they managed to raise more than $6 billion — a whopping 85 percent increase over 2010. Compared with all other industries, tech companies saw the highest returns in the first week of trading, according to PricewaterhouseCoopers. Still, analysts say it’s important to look beyond the stock price for real value.”

Let’s take a look at that, shall we.

Looking beyond the stock price

True value, or intrinsic value, of a security is its real value while stock price is whatever the investment community has deemed as the appropriate value at that time.  So, when a company has decided to “go public” an underwriter, such as Goldman Sachs, for example, will perform an evaluation and determine what the opening (or initial) price will be.  How, then, does an investment company actually determine value?  What are the variables involved?  Steven M. Davidoff, of the New York Times, brought the IPO process to light in a report that examines the implications of underwriters self-regulating the initial public offering guidelines.

Facebook’s book value 

Depending on your sources, Facebook is said to be worth $50 billion and some have even stated as much as $90 billion- which Goldman Sachs, lead underwriter for the would-be IPO, is banking on.  As stated by Wired.com, Goldman Sachs “is investing $450 million in the social networking website and raising at least $1.5 billion more from its wealthy clients.”

However, there are those who disagree with the $50B figure.  CNN reported early 2011 that there are some “observers who aren’t so bullish” on the matter:

“Facebook’s not worth $50 billion. I mean, it’s just not,” according to Douglas Rushkoff, an author and respected teacher on new media. “What people think is that Facebook in the future might be worth more than $50 billion, but for Facebook to be worth more than $50 billion it would have to become a permanent fixture.”

Furthermore, a study was conducted by Cauwels and Sornette (2011) evaluating the social media sector on companies such as Facebook and Groupon and determined the “real” value based on three different pre-determined criteria.  According to their findings, Facebook is said to be worth- on the low end- 15.3 billion and on the high end 32.9 billion.

Whether it’s true or not, the one thing that is not in question is Facebook’s ability to draw in shareholders.

As told in the report by Wired.com, Facebook expects to hit the crucial 500-shareholder mark.  If so, it must file quarterly and annual reports with the SEC “within 120 days after the end of the year” – which means by April 2012.  Additionally, “According to federal laws and SEC rules, any company with 500-shareholders and $10 million in assets must file financial reports with the government.” However this does not mean they are required to go public.

Hot IPOs? Try lukewarm

Many have tried to make the claim that it was the financial flop of 2008 that triggered investment bankers for now only dealing with “safer” companies and/or industries, but that is not so.  The move towards large start-ups occurred well before then.  According to the Progressive Policy Institute, a public policy think-tank, before 1999, the average deal size for IPOs were under $50 million with 547 initial public offerings averaging yearly.  By the new millennium, the average number of IPOs dropped to 192 per year but with the average deal doubling in size.  Below is a graph produced in December 2011 from the PPI illustrating this fact.
Slide1
“By 2009, according to the market analysis firm Grant Thornton LLP, the average IPO was $140 million, and IPOs under $50 million were practically non-existent,” according to Progressive Policy Institute.

“Face” value

One can’t help but relate the latest ‘pop-to-bust’ IPO trend to the dot-com crash.  This, however, has not depleted interests in tech stocks.  The clamor for more tech start-ups could see a push towards smaller and/or lesser-known firms; as the larger “hot” IPOs are being overvalued.  Added to this, a study conducted by the IPO Task Force shows that small-cap performance returns equals or exceeds large-cap IPOs.  This is evidenced by companies – that have also gone public in 2011 – such as Imperva Inc, InvenSense Inc and ServiceSource International Inc performing exceptional gains of 124%, 48%, and 50%, respectively, data provided by IPO Candy. But, if you’re not already attached to an institutional or retail investment arm, more than likely, you’re already cut off at the IPO knees.

Which brings us back to Facebook: Could Facebook become the next great IPO success story like Google?  Who knows, but the difference between the two is that Google- unlike Facebook- has plenty of opportunities for expansion.  Sounds harsh, but it’s true; just take a look at what’s happening with Facebook’s efforts in Europe and Asia, specifically, Japan.  Also, troubling for the internet darling is that it may be drastically overvalued which could hurt them in the short run like the other tech-pops.  And so it goes, while companies such as Zynga, the creator of Farmville, and others are attaching themselves to Facebook to find new growth, Facebook needs to attach its “face” elsewhere instead of the IPO bandwagon.

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