On Wednesday, June 6, at precisely 10:00 a.m. EDT, a major
moment for the stock
market
may have been marked. That's when
shares
of
Facebook (Nasdaq: FB)
fell to $25.52 before turning up. For folks that bought into the
IPO
, hopes are building that this price marks the all-time low and
that it's all uphill from here.
For the thousands of investors that passed on the IPO but have been
watching for signs of an entry point, that intra-day bottom is also
being eyed. Will it hold? Time will tell, but the time has surely
come to figure out what this business is really worth.
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In roughly two weeks, the investment banks that brought Facebook
public will issue their initial reports on the company. You can be
sure these analysts will generally gush about the stock, as they
will be enlisted to help their firms save face, suggesting the
stock is still a great one to own.
But is that really the case? Is Facebook poised for better days
ahead or is the recent low just a pause before the next downward
move? To help answer those questions, we can turn to the analysts
who have already weighed in on the stock. These analysts are able
to publish before the 25-day "
quiet period
" ends, because they had no role in the IPO. Presumably, they
canoffer unvarnished opinions without their superiors coaxing them
into being
bullish
.
I've been reading three reports, and each has a unique conclusion.
Let's take a closer look.
1. Bernstein Research: $25price target
This is one of the most respected research firms on
Wall Street
, in part because the firm doesn't underwrite IPOs and has no
research conflicts. Bernstein's take: Facebook is dead money. The
key concern is one many investors have: "We believe there is
material risk that over the next 12 months investors will question
Facebook's ability to achieve our forecasted 2013 revenues (of
$6.44 billion) as near-term revenue growth decelerates." This
revenue base implies roughly 30% over the 2012 forecasts of $5
billion, and will only come if Facebook succeeds in boosting fees
for existing corporate users without alienating them in the
process.
To be sure, Facebook's second-quarter is likely to be quite good.
Newly-public companies always aim to pack a bunch of good news into
their first
earnings
report. Often times, it's the quarter after that when reality sets
in.
Bernstein's Carlos Kirjner spends 39 pages detailing the company's
positioning in both social advertising and display advertising, and
thinks it will be the latter that emerges as the company's
long-term strength. The recent decision by
GM (NYSE:
GM
)
to pull a $10 million social advertising campaign from Facebook
highlights this uncertainty. If Kirjner is wrong and social
advertising eventually emerges as a key alternative to
Google's (Nasdaq:
GOOG
)
massive display ad business, then he concedes that shares would
trade up into the low $30s.
2. Pivotal Research: $30
price target
This firm initially picked up coverage a few weeks ago with a
"sell" rating, noting that the projected $42 post IPO price was
just too rich. They upgraded that rating on May 31 to "hold," as
shares had already fallen below that $30 target. Echoing
Bernstein's comments, they note investors have "increasingly
incorporated diminished/lumpy revenue expectations for revenue
growth for the next several quarters." Indeed, part of the recent
controversy around the IPO involved alleged communications from the
investment bankers to favored clients that Facebook's near-term
revenue projections were too optimistic.
Analysts at Pivotal lay out several near-term concerns beyond the
revenue issues, including:
• More than $2 billion in 2012 capital spending which may not be
embedded in many forecasts.
• "The likelihood of continued acquisitions without a definitive
investment return profile."
• and rising
operating expenses
that investors may be underestimating.
It's the second bullet point that has me greatly concerned.
Facebook shelled out $1 billion (in cash and stock) for
photo-sharing site Instagram in early April, which is an absurd
purchase price. This creates the concern that management will be
reckless in deploying the company's cash and shares.
But Pivotal's analysts, as is the case with Bernstein's Kirjner,
also draw a brighter long-term conclusion: They say investors will
fully digest the near-term challenges as 2012 winds down. "Facebook
by then will have cycled through difficult comps and investors can
better focus on the fundamental growth story."
3. JMP Securities: $37 price target
I should caution that this firm has never met a tech stock it
doesn't like. Only 2% of the 359 companies it currently follows are
rated a "sell." That said, they say shares will smartly rebound
when the investor focus pivots away from the 2012 challenges and
back to the long-term opportunity for what is still a revolutionary
company. Investors "shouldn't underestimate Facebook's highly
creative management team, its large user base, the virtuous circle
created by its size to attract more users, and the attractiveness
of such a large user base to advertisers," they say, adding that
Facebook's current 11% share of the roughly $30 billion worldwide
display ad market could grow to 22% by 2015.
So how do they arrive at that price target (which represents 50%
upside)? Well, with several large grains of salt. They say shares
should sport a price-to-earnings (P/E) ratio that is 50% higher
than the three-year earnings growth rate of 36%. This means shares
should be valued at 54 times projected 2013
earnings per share (
EPS
)
of $0.68. My take: that's a
bull market
P/E ratio, and we're not in a bull market right now.
Risks to Consider:
It's all about the next few quarters. Facebook is coming up
against very strong comparisons with year-ago quarterly results,
and unless this year's quarterly results are stellar, investors may
conclude that lofty long-term growth targets will be unattainable.
Action to Take -->
After reading all three of these reports, I can draw a fairly
nuanced outlook: Facebook is a near-term buy, a medium-term sell
and a long-term buy.
In the near-term (on or around June 25), the
underwriting
analysts will gush that this is the best company they've ever seen.
That could give a solid lift to the stock. Roughly a month later,
Facebook will delivered second-quarter results and forward guidance
that may be underwhelming (if these analysts are correct). This
suggests booking profits if shares rebound in coming weeks. Yet
over the long-term, there's a real chance Facebook will find many
levers to growth.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of GOOG in one or more if its "real money" portfolios.