Facebook a good buy at US $ 22 ? ~ Consider these Short Term Risks

Facebook a good buy at US $ 22 ? High/ Low in the three months  since IPO earlier this year is US $ 45 (Listing Day,May 18,2012) and US $19.82

The Consensus is Bullish going Forward a Year with target price to recover to IPO Pricing Levels of US $ 38

However Consider these Short Term Risks (source : business insider)

• Significant Increase in Floating Stock in the next few months

Currently 420 million shares @ 15% of the Equity are issued in the IPO are floating ~ Ken Sena of Evercore works out that in the next few months this floating stock will move up significantly as below and while at this low Price Shareholders may not wish to sell,there will be selling pressure at significant rises

August 15, 2012: 268 million shares, 10% of shares outstanding
October 14,2012: 249 million shares, 9% of shares outstanding
November 13,2012: 1.332 billion shares, 49% of shares outstanding
December 13,2012: 124 million shares, 5% of shares outstanding
May 17, 2013: 47 million shares, 2% of shares outstanding

• Facebook facing huge Cash Outflow of @ US $ 3 Billion towards Tax Charge for vesting of Restricted Stock Units (RSUs) to Employees in the next few months

The Value at which this RSU is vested is taken as compensation to employees and Facebook will have to pay withholding tax ~ @ 400 million RSUs have been granted of which 273 million come up for vesting in October and November this year ~ Facebook has Cash of over US  $10 billion  so it won’t have to face any crunch on this .However such an outflow will cause Facebook to rethink buy backs and other application of funds that they be planning ~RSUs actually create some value for Employees depending on market price ~ it is preferred over stock options that may lapse if not exercised because they are cost more than the market price

• Valuations yet high ~ @ 35 times FY 13 Earnings against just 12 and 13 times for Apple and Google

Facebook attracted unprecedented Demand for Shares in the IPO Process ~ Top Management decided to raise the quantity on offer and also the IPO Price to US $ 38 ~ the Premium was unprecedented too ~ as the potential of significant Non Linear Earnings Growth over the coming years was hyped up considerably ~ Irrational Exuberance on hindsight ~ Rationality and Sanity followed almost immediately and Share Price has been declining,with a few bounce banks, ever since IPO

So if Facebook has to dive to Apple Valuations,the Share Price has to dive by half  to @ US $ 10 ! ~ It’s already halved from IPO Levels of @ US $ 40 ! ~ So unless Facebook is able to amply demonstrate in advance and in the next few quarters that it will  deliver on non linear growth in earnings in the coming years,expect the Share Price of Facebook to stay range bound at current price levels in the near future

However having warned this,the Faith in Facebook remains quite intact ! ~ one cannot overnight create a social network of 900 + Million members ~ and if mobile advertising takes off big time, such a membership database will attract advertisers by the drove  as they will get more bang for their buck ~ some corporations  have dropped or reduced facebook advertising  as they currently don’t see value as there is a perceptible drop in members accessing facebook to play games online ~ most prefer twiddling with apps and games on mobiles now ~ facebook realises this and is adapting ~ It can learn from the rapid decline in the share price of  Zygna,the creator of games online but which don’t have a mobile app and platform

I had blogged on Facebook on May 19,2012 stating that the risk was clearly there and the valuations were hyper

https://www.gauravblog.com/?p=1629

I had expected some buoyancy on listing and am surprised by this significant fall that underwriters and lead managers have been unable to prevent,despite their efforts to support the Price ~ there are also class action suits being filed against them by retail shareholders for not properly disclosing to all,and selectively conveying the significance to big clients alone,a late (just before IPO) downward revision in business prospects and therefore revenues and earnings expectations ~ NASDAQ too has agreed to pay an amount to Facebook for messing up listing ~ Clearly there is more than meets the eye in the Facebook Enhanced Offering & Pricing and Delayed Listing on Day 1 ,May 18,2012

Normally in a secondary follow up offering, like Zygna and Linked did,Facebook could have easily accessed the Equity Markets and raised funds if the share price had risen over IPO Price or at least not fallen as significantly as it has ~ It could have pooled shares that were desired to be sold by shareholders and placed them with big buyers ~ this is unlikely now as Facebook Share Price has dropped sharply to levels of US $ 22 now from the IPO Price of US $ 38

So should one have Facebook in one’s Equity Portfolio ? Yes ? At US $ 22 ?

Nice Argument either way !

Cheers !