Wednesday, May 18, 2016

Analysis: A sobering look at Facebook

(Reuters) - It's the yr's hottest initial public offering, but some wlth managers find themselves having a hard time recommending Facebook to their clients.The world's biggest social network is expected to seek a $75 billion to $100 billion valuation in its IPO, the most anticipated stock offering from Silicon Valley since Google Inc went public in 2004.
At Granite Investment Advisors in New Hampshire, Chief Investment r Scott Schermerhorn has alrdy been fielding queries from clients ger to get in on the action.
"We had some clients call and once we step them through the s, they sober up," he said. "The valuation is 100 times rnings in a stock market that is trading at 12."
"At the end of the day, if you have a small amount of money that you are in a position to lose a chunk of it and you want to speculate on Facebook, go ahd," he added. "But don't use money that you rlly need to save to do it. I would put it in , which is dirt c right now."
To be sure, most technology analysts would argue that Facebook's growth potential far exceeds that of Corp, whose stock has largely traded between $20 and $30 in the past decade. It is taking its first steps toward content strming for instance, and has yet to make a serious overss thrust.
And a $100 billion valuation for Facebook at the top end - while huge in absolute terms - is not that out of w in Silicon Valley IPO tradition. Facebook is seeking a multiple of up to 27 times annual revenue, or up to 100 times rnings.
Inc - today, the world's most valuable technology corporation - went public at a valuation of just $1.19 billion in 1980, equivalent to 25 times revenue and 102 times rnings. Google - to which Facebook is most often msured against in terms of potential - was valued at $23 billion at the time of its 2004 debut, or 218 times rnings.
But the sheer size of Facebook's valuation mns that it will have to become the world's first $700 billion company if it is to replie the gain in Google's stock.
"At these valuations, investors rlly need to set aside emotion...and invest with their hds," said Edward Reinhart, managing partner at Capital Advisors Wlth Management, who owns Facebook shares bought on private markets two yrs ago.
Reinhart, who advises clients on retirement planning, warned that hype building up ahd of Facebook's IPO could mn "dangerous waters for the retail investor."
Facebook, led by 27-yr-old Mark Zuckerberg, on Wednesday filed its IPO prospectus with the Securities and Exchange Commission, seeking to raise $5 billion.
The anticipation surrounding the company and its growth potential recalls the hoopla that accompanied 's, Google's, and Inc's stock debuts. All three companies have done the nr-impossible -- lived up to the hype.
There are many who believe Facebook will do the same, pointing to its 843 million users and the fact that the company is much bigger and more profitable than other recent Internet debuts, such as the loss-making Pandora Media Inc or Groupon Inc.
Social game company Zynga closed up nrly 17 percent on Thursday in the first trading session after Facebook revled it made 12 percent of its revenue last yr from the game publisher.
"Facebook has the most potential," said Greenwich, Connecticut-based investment manager Jeff Matthews, spking about its business plan rather than its stock price. "It's the next Google."
While retail investors are still combing through the s and doing the math, institutional investors have quietly bought Facebook shares via private pre-IPO exchanges like SharesPost and SecondMarket.
About 50 equity funds of the 3,842 tracked by Morningstar disclosed holdings of Facebook stock, led by Morgan Stanley's institutional Opportunity H fund with 3.5 percent of its $242 million portfolio devoted to the social network.
Other funds that have disclosed holdings included those managed by Fidelity, T. Rowe Price, ING, Principal and MassMutual.
As with and Google, consumers feel strong emotional connections to Facebook, which could make its stock vulnerable to wild swings if it attracts many retail investors.
When the SEC relsed Facebook's IPO prospectus on Wednesday evening, its website slowed to a crawl as traffic incrsed 100 times. Facebook also made it into betting books - Irish bookmaker Paddy Power is taking bets on what the share price will be when the social network begins trading.
The odds are 7 to 2 so far that investors will be paying between $25 and $34.99 for a share, according to the bookmaker.
"The challenge is trying to keep individual investor enthusiasm in some sort of line with economic rlity," said Lise Buyer, an IPO adviser who worked at Google at the time of its IPO, but hasn't worked on the Facebook IPO.
Facebook "has very strong prospects, but all companies have stock prices that at some point must correlate to fundamentals."
The social network's 2011 revenue rose 88 percent to $3.71 billion while net profit incrsed 65 percent to $1 billion in last yr. Those are not stellar s when compared with 's 65 percent growth in revenue to $108.24 billion in fiscal 2011. also outpaced Facebook in terms of income growth, with profit incrsing 85 percent to $25.92 billion.
Despite this, - with nrly $100 billion in cash and securities - trades at a forward price-to-rnings ratio of 13 times, far lower than the 100 times historic P/E of Facebook's IPO, assuming the $100 billion valuation.
Even -- which saw net income grow 23 percent to $23.1 billion and revenue rise 12 percent to 69.9 billion for fiscal 2011 -- trades at 11 times future rnings.
That's why Schermerhorn, whose firm alrdy owns shares, said he preferred to invest in over Facebook. Amazon's shares trade at a relatively dr forward P/E of 131, while Google trades at 19.5.
"I know it is dominant in its space. Granted, the space is not growing as quickly as Facebook, but I am getting a nice dividend to wait," he said of . "I don't have that with Facebook."
(Reporting By Sarah McBride and Poornima Gupta, editing by Tiffany Wu, Ed Lane and Carol Bishopric)

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