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Wall Street Beat: After Facebook fiasco, don't write off tech IPOs

Marc Ferranti | May 28, 2012
The Facebook IPO may have been a fiasco, but don't put the nail in the coffin just yet for other tech offerings this year.

The Facebook IPO may have been a fiasco, but don't put the nail in the coffin just yet for other tech offerings this year.

The success or failure of tech company IPOs will depend on market conditions, not fallout from Facebook, analysts say.

The Facebook IPO was in many ways an anomalous event, a public offering of one of the most-hyped companies ever, taking place against market headwinds. The events specific to the whole mess -- which ultimately, successfully brought in US$16 billion for Facebook -- don't by themselves mean that a tech bubble has been burst.

"An Internet bubble came and went in one day," said John Fitzgibbon, who runs IPO

"One thing got overlooked in all the hysteria," Fitzgibbon said. "The stock market was not in great shape." On the eve of the IPO, the Nasdaq had come down from earlier highs of the year, and they are still down. The tech-heavy Nasdaq, which closed Friday at 2837.53, down by 1.85, is now about 10 percent off previous highs.

Problems with sovereign debt in Europe, fears that Greece will default and pull out of the euro, and mixed economic reports in the U.S. have put a damper on stocks lately.

"I've talked with investors and they've been grumpy -- things were getting a bit frothy right up to the Facebook IPO," said Canaccord Genuity analyst Richard Davis.

Meanwhile, a lot went wrong with the Facebook IPO itself, starting with how the offering was put together. Facebook picked a half-dozen high-profile investment bankers, led by Morgan Stanley, to see the offering through.

"What if putting way too many banks on a cover, thereby slicing fees to insulting levels for everyone, simply makes nobody interested or accountable?" asked Davis. "I've said it before, and even if it hacks off issuers, boards, or whatever -- it is just plain stupid to do IPOs with so many banks on the cover."

The underwriters at the last minute increased the size of the offering and jacked up the offering price to an astronomical value, compared to what the company actually earns.

Even based on the value of Facebook shares a week after the IPO, down about $7.00 from the initial asking price, the company's price-to-earnings ratio is 72.20. In other words, it costs about 72 times the amount that Facebook is earning per share to buy that share. Apple, arguably the most successful company on the planet right now, has a P/E ratio of only 13.68. (Facebook's earnings per share are $0.43, while Apple's are $41.04).

Then, stories from Reuters and the Wall Street Journal, among others, reported that a Morgan Stanley analyst had cut his revenue forecast for Facebook in the days before the offering, and may have only told top clients verbally, rather than spreading the word publicly. If true, this action could be interpreted as an infraction of financial laws, and now spokesmen from U.S. House and Senate committees monitoring the financial sector, as well as the state of Massachusetts, say they are looking into the matter.


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