4 Reasons Facebook Shares BOMBED
After a disappointing first week of trading, Facebook (NASDAQ:FB) shares closed at $31.91, roughly 16% below the $38.00 IPO offer price. Today, shares closed down another 10% to $28.82. Here are 4 reasons the stock has gotten slaughtered:
1) NASDAQ glitches led to a messy Facebook debut. According to Bloomberg, the computer systems used by NASDAQ to set the stock’s opening price were overwhelmed by order cancellations and updates, resulting in an imbalance of buys and sells that led to a thirty-minute delay in trading. At 11:30am ET, NASDAQ (NASDAQ:NDAQ) officials manually intervened to allow the opening auction to take place.
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2) We believe that the number of shares offered overwhelmed demand. In an S-1 filed May 16 (only two days before the IPO), Facebook increased the size of the offering (including the over-allotment option) to 484 million shares from 388 million shares. The 484 million shares represented close to 20% of fully diluted share count after the offering, a significantly higher percentage than is typical in IPOs. Perhaps more importantly, the offer size totaled over $18 billion, or 10x the offer size from the Google IPO almost eight years ago.
3) Share also hurt by reports of material information selectively disclosed. Facebook and its underwriters are being sued for alleged selective disclosure of weaker growth forecasts before the IPO. The information was allegedly provided to underwriters’ key clients, possibly providing an unfair advantage.
4) “Shorting” put additional downward pressure on shares. According to the Wall Street Journal, trading desks at two of the IPO’s underwriters and at other banks were lending out the shares hedge funds needed to “short” the stock.
Despite these near-term issues, we expect dramatic long-term revenue growth. Facebook has built a huge moat between it and its competitors, and we endorse Mr. Zuckerberg’s mission (if not his wardrobe). As Facebook enhances the user experience, we expect three things to happen: (1) a better experience will lead to more users; (2) a better experience should also lead to more engagement; and (3) a greater user base that spends even more time than the current user base will likely be an irresistible target for advertisers.
Maintaining our OUTPERFORM rating and 12-month price target of $44, which implies a 22x multiple on our hypothetical 2015 EPS figure of $2.00. We think that our price target is warranted due to Facebook’s huge upside potential for revenue and earnings growth.
Michael Pachter is an analyst at Wedbush Morgan.
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