Facebook Float – Investors Were Treated As Cannon Fodder

Facebook was one of the largest initial public offerings of the last few years and the most eagerly anticipated one since the mighty Google went public in 2004. But, while Google shares delivered a very healthy profit of 127% to investors after 145 days, Facebook, on reaching the same benchmark has investors who backed the IPO are now nursing a loss of 47%. It also seems in light of new reports in the press today that retail investors were de treated unfairly and unequally compared with institutional investors with important information withheld from them.

On May 18, Facebook finally went public and its IPO was priced at $38 per share, valuing the company at 107 times its trailing 12-month earnings. The IPO price range was also unexpectedly raised just a matter of days prior to the IPO as the greed monster took hold of management and the syndicate banks the were co-ordinating the float. The result was an allocation of shares to retail investors that was much higher than expected – the classic “pass the parcel” where “mom and pop” investors got stuck holding the parcel! It was no surprise then that the artificially high price then tempted out a swathe of sellers and so the price deflated very quickly. If we add to the equation all the glitches experienced in the first hour of trading – a supposed technical error on Nasdaq’s part, and the hide and seek games played by Facebook execs n the aftermath; the massive destruction of investors’ value, in hindsight, is now easily explained.

Soon after the IPO, a number of shareholders filled a lawsuit in New York against the company alleging that important information on the financial outlook was selectively disclosed to big banks ahead of the IPO. Reuters reported that Morgan Stanley, the underwriter, received privileged information about Facebook’s financials, information that, inappropriately, was not publicly shared. Adding to the case is the fact four banks cut earnings estimates for the company ahead of the IPO that was also selectively disclosed. Who said markets were fair and equal eh?!

More allegations of misinformation now come to light

It seems now that Facebook insiders have been hiding sensitive information almost as a matter of course. Proof of this is the volume number of letters exchanged between the company and the SEC before the IPO. The SEC was concerned with many issues in the initial fillings, especially with decelerating revenue growth, user count issues, and dependence on gaming company Zynga. Those matters were all missing or understated in the first filings and this led the SEC to ask the company to change them in order to give proper and accurate information to investors.

One billion users – just not making any incremental money out of them

It seems that just 8 days before the IPO and, only after SEC enforced it, the company amended its IPO prospects to state that mobile customers were increasing faster than advertising growth, potentially hurting revenue. This was very sensitive information that was digested by the market too late. The fact Facebook doesn’t make much money per mobile user is a concern but, the worst is the fact Facebook was changing its user base from desktop to mobile, a platform that makes almost no money from advertising. Indeed, only a few days ago the company said that its user base has grown from 845 million to one billion since the year’s start, a seemingly impressive 18% growth rate but that approx 600 million of these users access Facebook through a mobile device – an area where they are not making any money! Given the problem in monetising mobile users this is a huge problem to the company that was already present at the time of the IPO, but was understated, and so perhaps deceived investors.

Huge insider selling in recent months

The final nail in the coffin for Facebook bulls has been the sheer number of insiders who have been huge sellers of shares since even before the company floated. They are clearly of the belief that the best growth period is behind the company and the route to exponential monetisation to justify the valuation is going to be difficult to say the least… When the first lock-up period expired, shares went down more than 6% and the same may occur in mid-October when a second lock-up will expire. With Facebook shares trading at 42x its projected earnings for the year and a heavy dependence on Zynga (19% of total revenues), investors could be forgiven in asking why pay that price when Google trades at 18x its earnings?