Business Technology

Wednesday 17 September 2014

How investors learned to like Facebook and forget the IPO

Published 31/07/2014 | 02:30

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Mark Zuckerberg, chief executive officer of Facebook Inc., center, Sheryl Sandberg, chief operating officer of Facebook, center left, and Robert Greifeld, chief executive officer of Nasdaq OMX Group Inc., center right, applaud on the day of Facebook's IPO

In the days after its infamously mishandled initial public offering in May 2012, it looked as if Facebook would struggle to become a must-own for fund managers.

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Now the company's $190bn (€142bn) market value makes it bigger than such bellwethers of the US stock exchange as Coca-Cola and AT&T. It's not a member of the Dow industrials, but if it were, it would be larger than two-thirds of that index's 30 members.

Shares of the world's biggest social network touched a record high of $76.74 (€57.27) after earnings and revenues easily topped analysts' forecasts, boosting its market value to nearly $194bn (€145bn). That ranks it 15th in the Standard & Poor's 500 benchmark index, 
just below the $196bn (€146bn) market cap of IBM.

"A 100-year-old company with real assets versus a company admittedly with virtual assets and they are trading at the same market cap - crazy," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group.

The speed of Facebook's rise to mega-cap status is what's notable. It took Apple nearly three decades to achieve such a market value; Google needed five years.

Facebook has only been public for a little more than two years, and only joined the S&P 500 seven months ago. Since S&P Dow Jones Indices announced the addition on December 11, Facebook shares have risen 54pc.

The gains represent a reversal of fortune for the social media company. After a botched IPO that infuriated investors in May 2012, the stock slumped, underperforming for 15 months before finally eclipsing its offering price of $38 in August 2013. Since then, Facebook shares have been unstoppable, doubling in less than a year.

"People understand the world is moving to mobile, and when you look at the time spent on mobile, Facebook has the lion's share," said Walter Price, managing director of the AllianzGI Global Technology fund, which owned more than a million shares as of June 30.

The firm has leveraged its position by selling put options, or negative bets on the stock, and buying more call options, or bets on the shares rising further. "This is a momentum stock you can put a price earnings ratio on," Mr Price said.

Facebook's rally has left e-commerce giant Amazon in the dust. That company's value peaked around $187bn in January but now hovers at around $165bn (see separate article on these pages).

Facebook's market cap is still dwarfed by the roughly $403bn in combined market cap for the two classes of Google shares, arguably the most similar in terms of revenue generation. However, Facebook tops Coca-Cola by about $15bn and Disney by more than $40bn.

Apple, the S&P 500's most valuable company, needed nearly three decades before its market value finally rose to more than $190bn, surpassing that level in late December 2009.

Google's move was swifter. The company went public in August 2004, and posted a closing market value of more than $190bn for the first time in October 2007, right around the S&P's peak before the financial crisis.

That's not to say there aren't detractors. StarMine, a Thomson Reuters company, sees Facebook as more overvalued than 95pc of the companies in its stock universe.

Using expected growth rates over the next decade, StarMine puts an intrinsic value of $29 on the stock. It has a high price-to-earnings ratio of 42, more overvalued than 90pc of the stocks StarMine tracks.

However, the stock's relentless march has left few willing to stand in its way. Investors betting on the stock falling have dried up. In August 2012, more than 80pc of shares available for short bets were being borrowed by investors expecting the stock to drop, according to Markit. Now, just 0.4pc of shares available are being used for short bets.

Of the 43 analysts with recommendations on the stock, 37 are "strong buy" or "buy" ratings, with six "hold" ratings.

"If you were looking to short names that were ridiculously overvalued and people were not even thinking the growth was going to continue, I wouldn't put Facebook in that category," said Stephen Massocca, managing director at Wedbush Equity Management.

"That being said, do I buy Facebook here? From my perspective, I am a value investor - I wouldn't get anywhere near it with a 10-foot pole."

That acceptance of Facebook's legitimacy as a successful and viable company makes the comparison to the classic names that now surround it on the market cap list more palatable.

"In some respects, Facebook speaks to a demographic shift in the way retailing, social media and virtually every other component of people's lives is being bundled," said Peter Kenny, chief market strategist at Clearpool Group.

"Investors are starting to see the brilliance of this platform in ways that haven't to date really captured the imagination of many."

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