The Facebook IPO Stock Price Decline
and its Aftermath. What Happened and
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This is a continuation of Part One of the Facebook
IPO Stock Price Decline and its Aftermath.

BTIG, the US-based global stockbroker, said it was still too
early to judge the true value of Facebook. "Valuing
Facebook is more art than science at this stage of its
development and the current state of both social and
mobile advertising," the firm said in a statement.
The firm said it had confidence in Facebook's long-term
advertising prospects, forecasting that advertising
revenues will rise to $8 billion in 2015 compared with an
estimated $4bn for 2012.”

How profitable Facebook will be well into the future is
obviously highly speculative. Most experts agree it will
depend on how well it can monetize its current site traffic. It
needs to build on this level of traffic, as its growth in this
area, at least in the US, is close to zero as the near full
market saturation. Facebook's audience growth rose only
5 percent in April 2012 from a year earlier, significantly
lower than the 24 percent increase it attained the year

It currently has earnings of roughly $1 billion on revenue of
$4B. In order to justify its IPO valuation it needs to
increase its earnings tenfold over current levels. As we
saw above its revenue growth is tremendous but slowing
down significantly from this year till next year’s forecast (64
to 40%). That trajectory needs to be ramped up if it is to
ever come close to warranting this valuation. It is taking
steps increase its advertising earnings performance per
page view. It is difficult because Facebook started as a
true community tool, and introducing more obtrusive
advertising may jeopardize the goodwill of its current
users. There is evidence that it initial users have already
cooled somewhat to it because of its popularity and
commercialization.  It is also diversifying its revenue away
from advertising. (95% to 85% last year to this year).
In any case, it is clear that advertising revenue growth
must be outsized for many years to come for it validate its
valuation. I don’t think it will do it.

There has been an overall sense of dismay and frustration
over the initial stock performance of Facebook. Almost a
sense of outrage as if the public has been duped by
Facebook and their investment banks. Is this justified or is
it just a case of overly optimistic expectations in the face of
an always/typically uncertain investment environment?

In general, it is thought that the issuing investment banks
intentionally price IPOs at a lower than deserved initial
level so as to induce a first day bump or “pop”. This
rewards those initial inside investors who may be selling
the stock, and who are the banks investment banking
clients as well as those able to buy the stock at issuance
price, who are the banks best sell-to customers. It also
serves to create a buzz around the stock, creating an initial
positive spin by the media and others. Of course, the value
of any new issuing company is speculative in the first
place, so all the banks can do is estimate the value, then
dial it back a little to create the initial pop. But the initial
valuation is still an estimate, one that can be right or
wrong, and as subject to the whims of the market as any
other stock.

It seems apparent that in this IPO, more than others, the
big inside investors were rewarded on the first day of
trading. The stock ran up from $38 to $45, then settling
back to $38 by the end of the day. Of course, many big
investors got out of the stock by end of the day, while
others were not even aware that there purchases were
executed, due to operational glitches. On the second day
of trading and beyond, the stock took a slow dive till its low
point of $25 on June 5th. So there are some that feel the
big institutions got their pop and the smaller investors were
left holding an asset whose valuation was in doubt – and
whose price gravitated to its true unprotected level.


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