25 May 2012, 15:22

Facebook shares fall flat

Facebook shares fall flat

The first day of trading Facebook shares on the NASDAQ Stock Market have caused a scandal. Shares went just barely above the initial pricing. At the same time, it has turned out that underwriter Morgan Stanley provided certain investors with an accurate forecast regarding the Facebook shares and that everyone else did not receive that information.

The first day of trading Facebook shares on the NASDAQ Stock Market have caused a scandal. Shares went just barely above the initial pricing. At the same time, it has turned out that underwriter Morgan Stanley provided certain investors with an accurate forecast regarding the Facebook shares and that everyone else did not receive that information. According to media, only a few big investors such as Capital Research & Management and Fidelity Investments had the information before the IPO went on the market. They bought fewer shares than they planned. Smaller investors did not receive the forecasts prepared by Morgan Stanley, Goldman Sachs, and JP Morgan. Many analysts have commented on the scandal around Facebook.

German Klimenko, the owner of the LiveInternet company, is one of the first Russian businessmen working in the internet sector who has tried to break the myths around Facebook.

“We became sure that Facebook is the new mission. It was obvious that Facebook is something extraordinary, but the question about making money was important. And we see today that Facebook revenue was overestimated, but not everybody is ready to agree with it. It’s OK that Facebook makes less than Google, but it will grow.” Now the question appears as to how to make money on Facebook. It’s the big question that faces all social networks like Odnoklassniki and VKontakte – not just Facebook.

Odnoklassniki and VKontakte are popular Russian social networks. Facebook started to have troubles after its appearance on the stock market was delayed. Then the shares failed and currently a scandal about inaccurate information provided to investors has surfaced. Executive editor of “VentureBeat” internet resource Dylan Tweney thinks that Facebook is still doing well.

“Ironically, now the big selling point is that it’s all in digital exchange, as it always has been, so the irony is that they had so many orders just before the opening of trading Facebook that their computers got overwhelmed and they weren’t able to process them. That’s why the trading began about half an hour later than expected. It may have cost people a bunch of money. There is a lot of blame to go around: the glitch on the NASDAQ, these possible trading improprieties – it looks like basically everyone except Facebook itself ran into major problems on this IPO. And I say except Facebook, because Facebook actually came out very well. They got money on the table, they priced exactly right, they collected a bunch of money, the bankers made a bunch of money as well. But it’s the other investors that got the short end of the stick if these allegations are true.”

Independent analytical agency Investcafe’s Ilya Rachenkov explains the main reasons for Facebook’s failure.

“Expectations towards growth of Facebook’s revenue or other financial indicators are the main underlying causes for such an evaluation. Generally, companies come to the IPOs being over-valued. The cause for this is that an IPO is actually the only chance for institutional investors to acquire a large stake in public companies without making the price on the market’s skyrocket.”

“Of course, they pay a premium during the IPO, but it’s a reasonable premium and it couldn’t compare to one that will be if they buy large amounts of shares from the open market. So, I think that it was the main cause for overvaluation of Facebook during the IPO.”

“There was such reason for expectations of revenue growth, but many analysts warned that these expectations are too high and Facebook has certain problems with the monetization of its capabilities as a social network. The third factor was great attention to the IPO in the media. So, summarizing these three reasons causes such high evaluation of the company.”

“Speaking about the future, I think the price of Facebook shares will go down. In my calculations a fair price for Facebook shares is about $20, and I expect the price will reach this level during the nearest 1 or 2 months”.

“Kommersant” newspaper’s writer Evgeny Hvostik brought to attention the fact that the specialists were warning about Facebook being overestimated, but they still see the potential.

Regulators could question Morgan Stanley on its announcements of Facebook advertising revenues to potential Facebook share buyers, and the mass media has suggested that Morgan Stanley did not properly inform all clients about the actual situation concerning Facebook’s advertising revenues.

Moreover, Facebook’s IPO grows with more shareholders protests. As can already be seen, several lawsuits have been filed against Facebook, Morgan Stanley and the NASDAQ stock exchange as well.

Shareholders are angry over the Facebook IPO’s price continuing to fall, and many analysts warned that even before Facebook’s IPO was very much overpriced and the key reasons for that were that Facebook showed a decline in revenue growth in the first quarter. Just days before the sale of General Motors’s IPO, the company pulled off all its advertising from Facebook, saying that advertising on Facebook doesn’t show any positive effect.

So, for now the skeptics have been proven right; skeptics who predicted that the buzz around the Facebook IPO was very much overhyped and that Facebook shares were overpriced. However, other analysts suggest that it depends only on Facebook activity and Facebook’s further financial statements.

If Facebook can show that its business has potential and if the company can prove that its advertising model is viable, share prices could go up again.

German Klimenko predicts that Facebook’s failure will lead to a domino effect:

“Overestimating Facebook led to wrongful financial decisions by underwriters and the company just doing everything to make the situation worse. We will see how everything that was under Facebook falls down like dominos: Zynga, Grouppon and others. Facebook’s failure affects all players of the Internet sector.”

According to Klimenko, the standard rule is this: if you want to make money on the stock market, it is better to invest in companies that have been an IPO for at least a year in order to know what to expect. Facebook has just given a prime example of how risky it is to buy shares in companies that have just entered the market.

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