William Henry considers the implications of the Facebook flotation
Whether the famous American showman, PT Barnum ever uttered the line: “There’s a sucker born every minute” or not, is, in many ways, moot.
Seemingly millions ticked that particular box by investing in the recent – and much publicised – $16bn Facebook IPO.
But the suckers are now fighting back; claiming in a writ filed last Wednesday that lead underwriter Morgan Stanley hid from investors (big institutions excepted) weakened growth forecasts for the company.
And all of this while the social networking company’s offer price was being bumped up and even more shares made available to investors.
Time will tell whether the writ has any merit or not. What’s clear is that the numbers being bandied about at the time were fanciful at best – a point that markets belatedly latched on to as Facebook closed down 16 percent from its $38 issue price by the end of its first week of trading.
Thomson Reuters Starmine’s conservative assumption of 10.8 percent annual growth (close to the mean for the technology sector as a whole) implies the company could be valued at as little as $9.59 a share, a 72 percent discount to its IPO price.
Similarly, Facebook’s price-to-earnings ratio remains stretched, even after the recent sell-off – its current $32 price implying a forward price/earnings ratio of 60, compared with Google’s 13.3, using a similar rate of growth.
Consensus estimates are for earnings per share of 0.49 for the year ending December 2012, rising to $0.64 a share for the year to end-December 2013 – based on 35 percent annual growth.
Yet even with those numbers the stock still looks overvalued.