Shares of Facebook will reportedly begin trading in May, and professional investors expect the stock’s price to rise 12% in the first quarter, according to a survey by Maven.
Despite that upbeat assessment, just 12% of professional investors surveyed by Maven said they planned to invest in Facebook, with 44% saying they would take a wait-and-see approach and another 44% saying they have no plans to buy Facebook shares. Most professional investors – including portfolio managers, investment bankers and venture capitalists – see Facebook’s IPO as a “retail play.”
“The market and headline risks outweigh the potential reward,” said Ryan Himmel, a registered security analyst, CPA and founder of BIDaWIZ.com, an online marketplace for professional financial and tax advice. “We would caution investors to wait at least 6 to 12 months until there’s better visibility on how the market values Facebook.”
Facebook is in a quiet period ahead of its offering and is declining comment on all questions related to its IPO. Among the red flags Facebook’s IPO is raising with investors:
Valuation
Facebook could be valued between $75 billion to more than $100 billion after its first day of trading, and those amounts are just far too high for professional investors. Himmel points out those valuations are 20 to 27 times more than last year’s revenue and 75 to 100 times more than the last 12 months’ net income, yet only 42 to 56 times higher than operating income.
Slowing Growth
In the Maven survey, 96% of respondents said they expect Facebook membership numbers to continue to grow over the next two years, but at a much slower rate. Unless Facebook can find a way to break into big markets where it is currently banned, like China, the company has largely saturated most of the markets it now operates in.
Reliance on Advertising Revenue
Facebook is finally making a push to increase mobile revenue, but it still by-and-large relies on advertising on its website for revenue. And the very nature of Facebook is to keep users on the site, meaning advertising click-through rates of 0.04%, less than half of the Internet average of 0.09%, according to tech stock investor Nicholas Pardini.
“Facebook can sell demographic data and page views to companies for research purposes, but growth in this sector is limited by potential privacy violation lawsuits and stiff competition in the data mining sector,” Pardini said, who also explored the Facebook IPO in a post for the investing website SeekingAlpha.
The one bright spot is that advertisers are still flocking to Facebook, at least for now. A separate Maven survey of social media professionals and marketing experts found that more than three-quarters plan to increase the amount they spend on Facebook advertising.
Increased Competition
Mark Zuckerberg grew his company to a $100 billion behemoth in less than a decade: an amazing feat, but also a reminder of how quickly the publicly traded Web space can change, Himmel said.
“Someone else could theoretically come into the market and create a network effect that could hurt Facebook’s growth and retention rates in the future,” he said.
And Facebook may end up hurting itself, in part because it is trying to please a new audience: Wall Street shareholders. Increased advertising, for example, may aggravate long-time users and prompt them to spend less time on Facebook. And one thing remains clear: Facebook will never be able to charge users directly.
“It cannot charge its customers because users will just migrate to another free platform to interact with friends, such as Google+ or a future ‘next Facebook,'” Pardini said.
Bottom Line: Professionals Are Just Saying No – for Now
“There could be violent swings in the stock price after it goes public,” Himmel said. “Sure, you could put aside some money that you’re willing to risk losing, but definitely be wise on how much of your portfolio you allocate until there’s a better understanding of the valuation.”
