Why Facebook's IPO Flop Is Good News
A multitude of issues impacted Friday's action in the stock. The Nasdaq exchange had to delay opening the shares, and underwriters reportedly stepped in and bought the stock when it touched the IPO pricing level of $38 per share at numerous times during the session. Both of these occurrences are never a good sign but taking these kind of hits early and alleviating some of the hype around the social networking giant may ultimately be a positive.
Wedbush Securities analyst Michael Pachter believes the underwriters may have overestimated the demand for shares on Friday, by adding an additional 84 million shares to the offering. However, Pachter still believes that Facebook has "huge upside potential for revenue and earnings growth," given its size and reach in the advertising markets. Pachter rates shares of Facebook "outperform" with a $44 price target.
Facebook priced its IPO at $38, opened at $42.05, quickly jumped to $45, and settled at $38.23, up just 0.6%. The stock was diving in Monday's action, falling as low as $33. It was changing hands at $33.66, down 12%, in recent trades.
Facebook has generated nothing in terms of revenue from mobile, where it has over 480 million users. In fact, it lists its mobile platforms twice in the risk factors section of its S-1 filing.
The mobile advertising market is expected to reach $2.9 billion by 2014, up from $1.6 billion in 2012, according to BIA/Kelsey. It's likely Facebook will capture a portion of this revenue, as it continues to focus on its mobile offerings. Buying Instagram for $1 billion is a prime example of Facebook boosting its mobile strategy.
It is about managing expectations, and Facebook will have to do so in the future if it wishes to grow its market cap in a meaningful way.
"Even if investors do believe in Facebook's potential, they may not give the company full credit for its future growth trajectory until it proves its ability to grow, for several quarters or even years," said Ken Allen, Director, Blackstone Advisory Partners, L.P in an email.
Facebook certainly has issues. It has to deal with major growth challenges . The ability to monetize mobile is one of the most important issues, if not the most important.
Forming a new developer strategy and generating significant revenue from payments are other issues that Facebook needs to solve to help support a supposed $100 billion-plus valuation.
Wall Street is already leaning toward the view that Facebook is not worth $100 billion, or maybe not even be worth $80 billion, at least right now. At its IPO price, Facebook had a valuation larger than McDonald's(MCD) , General Motors (GM) or Goldman Sachs (GS) .