Facebook Inc.’s shares will increase to $37.95 over the next year, 5 cents less than the initial price set when shares began trading in May, according to the average analyst estimate compiled by Bloomberg.
At least 17 securities firms began coverage of the social- network operator today, including its lead underwriter, Morgan Stanley. The New York-based bank started Facebook with the equivalent of a buy rating, as did seven other firms including JPMorgan Chase & Co. and Goldman Sachs Group Inc. There were eight holds and one sell, data compiled by Bloomberg show.
The analysts’ underwriting banks have come under criticism after the IPO was set at a price that valued Facebook at 107 times reported earnings in the past 12 months, more than every Standard & Poor’s 500 Index stock except two. Facebook fell below its initial public offering price of $38 on the second day of trading on May 21 and hasn’t returned since.
“Facebook is uniquely positioned to leverage its large and highly-engaged user base to monetize the mobile Internet,” said Scott Devitt, an analyst at Morgan Stanley, in a research report initiating coverage today. He set a price estimate of $38 and rates the shares overweight.
The average share-price estimate from firms tracked by Bloomberg implies a 15 percent gain in the stock during the next year from yesterday’s close of $33.10. The compares with the 22 percent average predicted advance for S&P 500 companies, the data show. Facebook fell 2.7 percent to $32.21 at 9:32 a.m. in New York.
Firms from Bank of America Corp. to Credit Suisse Group AG and Citigroup Inc. gave Menlo Park, California-based Facebook the equivalent of a hold rating.
Citigroup’s Mark Mahaney, in a report titled “Easy to ‘Like,’ Hard to Love,” said Facebook’s “significant” long-term prospects are offset by the stock’s valuation and slowing growth in users. He said the company trades for 50 times his estimate of 2013 earnings.
“Super-high multiples and decelerating growth don’t mix well,” Mahaney said.
Before the IPO, on May 9, the company amended its IPO filing to say growth in advertising had failed to keep up with user gains. It then contacted more than 20 analysts, including those at underwriters Morgan Stanley, Goldman Sachs and JPMorgan, to guide them toward the lower end of its second-quarter sales estimate, according to a person with knowledge of the matter.
A day after that filing, the analysts called up some investor clients to communicate their revised estimates for sales and profit, said people with knowledge of the process. The company didn’t give the analysts any materially different information than the updated prospectus, said a person close to the situation.
On the eve of the first day of trading, May 17, Facebook and lead underwriters including Morgan Stanley, Goldman Sachs and JPMorgan Chase met to determine the IPO price, according to people familiar with the matter.
On the conference call, joined by Morgan Stanley Chief Executive Officer James Gorman and Facebook Chief Financial Officer David Ebersman, the company and its lead bankers discussed an IPO price range of $36 to $41 a share, people with knowledge of the matter said. Ebersman’s aim was to maximize the company’s IPO proceeds and to cap the first-day increase at 10 percent, said the people, who asked not to be identified because the talks were private.
JPMorgan bankers indicated that they had significant client demand at a price above $38, one person said. The group quickly reached consensus at $38 and discussions were not drawn out, the people said.
The shares rose 0.6 percent to $38.23 on the first trading day, before plunging 11 percent on May 21 and closing as low as $25.87 on June 5.
Daniel Salmon, an analyst at BMO Capital Markets Corp. in New York, initiated coverage with a price target of $25 today and rated Facebook underperform, an equivalent to sell. Facebook’s user growth will slow to 16 percent in 2014 from 22 percent next year, he said.
“With user growth decelerating, pricing power will be required to support the valuation, and we believe this will be a challenge in light of industry-wide declines,” Salmon said.
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