Facebook IPO: Insiders Private Opportunity?

Although most of the IPOs have been successful in the past, there are quite a few which haven’t stood up to investors’ expectation. Few quotable IPO failures in the past would include that of TheGlobe.com, Shanda Games (NASDAQ:GAME), Blackstone Group (NYSE:BX), Pets.com, eToys.com and Omeros (NASDAQ:OMER). Reasons being each stakeholder in a company has varied and diversified interests. For example, an IPO does not necessarily mean that the company is in need of capital, but it could also mean that promoters and other Private Equity/Venture Capitalists would like to exit at a good price.

Yet another name to be included in the above list is that of the Social Networking giant, Facebook, Inc. Yes! Facebook’s IPO too is considered a disaster. Investors believed in the growth story of the company and may be the company’s performance was hyped to a great extent. Investors thought that the God of social networking Mark Zuckerberg would never disappoint his investors. But alas, the stock faltered as soon as it opened the next day and is currently trading at a mere ~60% of its listing price ($38) in NASDAQ.

Now let’s try and understand why Facebook IPO is a disaster? - Let’s compare another giant Google Inc (NASDAQ:GOOGL) which is a main competitor for Facebook. Google adopted a method called ‘Dutch Auction’ when it went public in early 2000s. Here are a few key metrics, which is worth comparing to Facebook stock:

Google stock Facebook stock
Revenue ($ millions) 50,175 5,089
Ad Revenue ($ millions) 43,686 4,279
Net Income ($ millions) 10,737 53
Amount raised in IPO ($ billions) 85 38
Share Price Growth (%)
1st day of trading 18% 0.6%
1 year return % 229.4% -30.9%
~ 10 year return (June 5, 2013) 911.4% ?

At Facebook’s EPS of 36 cents and the P/E close to 100x; the Company also made a fatal error of increasing the Facebook share count by 25% at the last moment before the IPO. This increase in share count had a dilutive effect on its EPS and further increased the P/E. How is it justified that a company commands a premium when its net income % is very low as compared to its top level peers, which is in a similar industry doing a similar business with an equivalent exposure to ad revenue (as a % of total revenue). Even if Facebook’s shares were to be compared to its major competitors (table below), we see that Facebook shares were at least 8x more expensive than Apple (NASDAQ:AAPL).

Company Stock Price 2012E EPS 2013E EPS 2012E P/E 2013E P/E
Apple Stock $621 $44 $53 14x 12x
Google Stock $641 $43 $49 15x 13x
eBay Stock $46 $2.35 $2.74 19x 17x

Source: Adroit Investments

Facebook Vs Google Vs Apple
Source: Facebook stock Vs Google stock Vs Apple stock by Amigobulls

All the above factors made investors realize that Facebook stock price was nothing but an over-hyped price build-up. Further to add to that, even on Facebook’s advertising revenue, the company has not been able to find an advertising model to generate revenues commensurate with its valuation. According to a few sources, Facebook had repeatedly told Morgan Stanley and other top Investment Banks about its challenges in mobile advertising before its IPO. This is important as consumers increasingly use mobile apps to use Facebook, the company would need to figure out how to shift its Ad sales to mobile platforms.

The investor confidence was also hampered as many early backers started selling off Facebook shares once the company went public. For example, Peter Thiel, a board member announced that he would be selling 16.8 million from the earlier 7.7 million. Total insider selling stood at around 57% (241 million/421 million) of the total shares sold. And analysts have analysed that it is usually around 10% for other companies which go public.

Facebook IPO is a classic case arising from sheer over-confidence of investors. The positives of exponential revenue growth and user growth were offset by bad due diligence and execution during Facebook’s IPO. According to experts, the next big question is that, can Facebook now justify its $104 billion valuation in the near-/medium-term!!!

In summary, as an investor, it is important to keep in mind to "buy the shares and not the hype". Look at EPS growth over the next few years that the particular company is offering; the comps multiples like EV/Revenue, P/E and the premium if any is really worth it; historical revenue and EPS performance, etc. and you’ll placed better off while investing in an IPO.

Let’s look out for the next big IPO, Twitter!

Amigobulls Amigobulls   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and FB stock

Where facebook went wrong? That is easy: Mark boy became greedy, merchant bankers are always greedy, initial investors thought it is next google!....and they lost money in IPO. Simple...
@FaceBooker - You would have made more profits by booking shortsale ;)
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