Wednesday, May 23, 2012

The FB IPO Debacle

We're probably beating a dead horse here, but thought to give one more update on FB.  As everyone already knows, FB's big four underwriters' analysts involved in the deal lowered their estimates after FB filed an amended S-1 which discussed the risk of minimal growth in revenues generated from the mobile platform.  In addition, some are saying that those analysts were provided with more 'color' regarding Q1 and FY '12 revenues, and FY '13 EPS by someone from FB.  What makes this even better is that the analysts lowered their estimates asindicated by Reuters earlier tonight (5/22).  And to top it off, some are saying that those underwriters only informed select clients (which we will safely assume means only institutional clients) of the downward revision of their estimates.  Retail investors were left in the dark, as usual.  To all of this, we say ... wow!  Then again, none of this is very surprising.

Based on this new info that strengthens our initial argument that FB remains overvalued, we lowered our own estimates (which we must note were pretty comparable to what Reuters says were Goldman Sachs' initial estimates).  The new projections are provided below.  We also lowered our terminal growth assumption for the DCF model, which along with lower top & bottom-line estimates, resulted in a $23.00/sh valuation.

But let us try to examine how all of this may impact the big four underwriters, the ‘muppets’ (or in this case the retail investors), and most importantly, the employees at FB.

The big four - Morgan Stanley, JP Morgan, Goldman Sachs, and Bank of America - will likely have to deal with a so-called investigation.  As usual, we know that they will likely get just a slap on the wrist, if the accusations are proven to be correct.

The retail investors lost more money, unfortunately.  This had added, and will continue to add, to the mistrust of Wall Street among individual investors, which is a negative for the market.

And what about those 'poor' FB employees?  We think that after hearing about accusations that some member(s) of the FB management team shared valuable information with underwriters and not with its employees, and that the information led to what appears to be a disappointing IPO, the employees will hold a possibly costly grudge.  Yes, many that were given shares early on will remain millionaires (or billionaires), but their worth has already declined 26% from where FB opened on May 18.  We fear that a lot of employees that were planning to leave the Company will do so even more quickly.  In addition, it may no longer be too easy for FB to find qualified employees to join its 'team', as such display of mismanagement may have reduced the number of 'likes' clicked on the statement (a virtual one) - FB is the best place to work at.  

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