Tags: Facebook | IPO | price | share

Facebook Goes Public at $38.23 a Share — Is It Worth It?

By    |   Friday, 18 May 2012 04:28 PM

The emblematic social-networking site Facebook went public on Friday after being priced at $38 a share, which valued the company at $104 billion, making the initial public offering one of the largest in history.

Company shares closed at $38.23 a share, barely up from its opening, after trading in the $40 range for much of the afternoon.

So was it worth it?

Not really, experts say, pointing out that while Facebook isn't a fundamental disaster, its shifting and often unclear business model makes the company unworthy of all the hype.

Furthermore, Facebook's revenue doesn't support such a high valuation, plus the verdict is still out on how it will keep generating top-line growth down the road.

There are 900 million users sharing anything from childhood photographs to political opinions on their Facebook pages, but monetizing the site will prove to be difficult.

General Motors, the third-largest advertiser in the U.S., just pulled the plug on paying for Facebook ads and smaller companies have noticed what many were afraid they'd see: lots of exposure but little in results.

"You are taking a hell of a gamble valuing a company as much as Hewlett-Packard or Cisco but with declining revenue — and when the third largest advertiser just announced it's not using Facebook," Bob Wiedemer, author of New York Times and Wall Street Journal bestseller "Aftershock" and Managing Director at Absolute Investment Management, tells Moneynews.

"I like Facebook and I think it's interesting and I think it's a great company but I think the valuation is ridiculous."

Other noted investors are pointing out similar trends.

"There isn't to me a lot of compelling functionality to Facebook," Christopher Whalen, Senior Managing Director of Tangent Capital Partners in New York, tells Moneynews.

"I just don't know long-term what the real drivers of Facebook are going to be. It's certainly gotten a lot of attention and a lot of hype but I just don't know what the business model is."

Josef Schuster, head of research firm IPOX Schuster in Chicago, cited the size of Facebook’s deal as the reason the shares didn’t rise higher Friday. “It’s a very large deal and typically the larger the IPO the smaller the pop,” he told Fox Business.

Schuster said the key will be whether Facebook’s shares can hold their value several days into trading. If the shares fall under $38 for several days next week, Schuster said it could trigger selling among big investors.

Smaller and more niche-focused Internet companies can charge for their services and grow from there, which Facebook is reportedly experimenting with.

Already in play in New Zealand, Facebook's new Highlight service makes sure posts don't get lost in the site's streaming news feed, as for about $1.50 a post, the company will ensure a user's friends see the posts.

But big companies like Facebook, which rose on the concept of free services, won't pull such a plan off.

"At the end of the day I still think this is a very speculative, short-term phenomenon on Wall Street, and I think six months from now Facebook is going to be in the same place as many other dot.com stories, which is once the hype has gone, the opportunity to make money by flipping the stock after the offering is gone," says Whalen, who adds he prefers big companies like Google that provide usable tools like email and other services.

"I just don't know what the drivers are going to be."

Others agree Facebook will battle headwinds if it follows the path of charging for its services or applications.

"If you want to be certain that your friends see something you have to say, why not just send them an email? Because charging you to ensure that your friends see your posts seems just like Facebook trying to charge you $1.50 per email," blogger Henry Blodget reports.

"We realize email is for dinosaurs (like us). But come on. $1.50 per post?" said Blodget, pointing out that that is several times the cost of a postage stamp.

It didn't take long for word to get out that Wall Street was a little cool to the shares, which received their first "sell" rating on Friday from Pivotal Research Group, which set a target price of $30 for the stock.

"We are wary of the disconnect between revenue growth and operating/capital expense growth expectations," Pivotal analyst Brian Wieser said in a research note, according to Reuters.

"The market is pricing Facebook as a less risky asset than Google, which we believe is simply not the case."

Some market watchers say they weren't surprised to see Facebook shares trade around $40 by midday Friday, not far from where it opened.

"Going into the IPO, there has been a lot of skepticism from investors, in particular institutional investors, questioning anything from whether the price of the stock is fair, to whether Facebook can successfully monetize and sell ads," says Chris Brown, manager of the Pax World Balanced mutual fund, which invested about $14 million acquiring private shares in Facebook on a secondary market before the IPO, according to the Associated Press.

"We're long-term investors. It's nice to have the stock up for one day, but it's only one day. It's hard to extrapolate much as to the future of the company."

Expect more ups and downs to follow as investors trade on a company with an evolving business model.

"You're going to see obviously an extreme amount of volatility over the next week as people evaluate the stock," Brown says.

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The emblematic social-networking site Facebook went public on Friday after being priced at $38 a share, which valued the company at $104 billion, making the initial public offering one of the largest in history.
Friday, 18 May 2012 04:28 PM
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