Facebook shares hit a new low yesterday, dropping 6% to $21.71 in regular trading hours and finishing at $21.61 in after hours trading. The shares floated at $38 in May, so the shares are down a tub thumping 43% since investors first had a chance to buy them at the ill fated IPO.
Yesterday, Swiss banking giant UBS yesterday said it lost Sfr349m (£227m) on the Facebook flotation (ouch!) as a result of its issues with early Nasdaq trades and the ‘technical glitches’. UBS was hit because there was a delay when Nasdaq processed its purchase of Facebook shares on the first day’s trading, meaning that trades were duplicated leaving the bank with more shares than its clients wanted to trade. UBS is suing Nasdaq for its losses.
Last week’s Q2 2012 Facebook earnings were poorly received after costs gres significantly as a result of aggressive people hiring. Managements failure to provide a forecast for the rest of the year has not helped sentiment too. Revenue grew 32% to $1.18 billion which, although slightly higher than expected, produced a net loss of $157 million, or 8 cents a share, this compared with net income of $240 million, or 11 cents a share, for the same period in 2011. Revenue growth of 32 per cent year-on-year in the second quarter was a deceleration from growth of 45 per cent in the first three months of 2012. Adjusted earnings for the recent period were $295 million, or 12 cents a share in line with expectations.
Yesterday’s drop was caused by a negative broker report by Bernstein analyst Carlos Kirjner. Kirjner raised his rating on Facebook to Market Perform from Under perform with a $23 price target on the stock but what, was worrying for investors, is the fact that he valued the underlying business at just $19 per share, with the other $4 per share as “longer term potential”.
Kirjner said “We believe that Facebook is worth $19/share (10 times estimated 2014 EBITDA plus cash) valued as just a display advertising business gaining market share due to its fundamental competitive advantages based on scale, user data and identity … The $19/share value does not assume upside from its social advertising capabilities and do not give Facebook any credit for upside from ‘yet-to-be-defined businesses’ based on its distinctive assets such as its social graph. Because these ‘upside’ opportunities are still highly uncertain, we value them at $4/share based on our sizing of such upside opportunities and our judgment of the probabilities they will come through, leading us to our $23/share valuation.”
“The decline in European CPMs in the second quarter, attributed by management to the poor macro environment, suggests that internet advertisers in Europe are not yet convinced of Facebook’s high ROI … The fact that Facebook’s revenue trajectory and key metrics are already being affected this heavily and this early by external drivers such as seasonality and macro give us pause for though. To us, this suggests that either the ROI on Facebook advertising is just not that attractive, or the company has a long and arduous path to making it transparent to advertisers.”
“As has been well telegraphed, over 211 million shares will be added to Facebook’s current free float of 484 million shares in August, an increase of nearly 40%; up to 355 million shares will be added to the float in October (an 73% increase versus the current float); and 1,339 million in November (a 276% increase compared to the current float)… While these are (supposedly) well known facts and should (in theory) be already reflected in the stock price, history suggests that there is a good chance of transient pressure on the stock price as liquidity increases abruptly. We would see a buying opportunity if FB were to trade around or below $19/share.”
At anything over $30, Facebook looked very, very expensive versus other tech companies. If the shares drop below $20, the company is starting to look much better value for those looking to trade the shares on a short term basis or perhaps even hold longer term. The Facebook brand is very well known and respected by its users and it is not inconceivable that Zuckerberg and his team can leverage this to launch new products and hence revenue streams.
Early Google investors will remember that the first and still most profitable product was Google Adwords – its advertising platform, but subsequently added YouTube and DoubleClick display advertising acquisitions helped broaden the company’s offering into complementary areas of the internet. With a large pot of cash, there is plenty of scope for acquisitions, hopefully not executed in the same way as the $1 billion Instagram deal which caught analysts on the hop!
We will watch this with interest and look for another swing buy trade if presented in the next few weeks.
Contrarian Investor UK & Editor