Let's face it: Facebook's (Nasdaq: FB) IPO has now officially flopped. After shares popped for literally one minute on IPO day up to $45 only to close almost exactly at the offer price, shares promptly got crushed on Day 2 and have reached as low as $30.98 as of this writing on Day 3.
That's a loss of 9% at the low, and a solid 18% below the $38 offer price. That low also puts Facebook's market cap around $85 billion, or $19 billion less than the $104 billion valuation it fetched based on the offer price.
What gives?
Pick a reason. Any reason.
There are plenty of possible reasons Facebook has unimpressed investors, whether it be its lofty valuation, reliance on Zynga (Nasdaq: ZNGA) for payments revenue, concentrated voting power that Mark Zuckerberg controls, or the fact that it's not Google (Nasdaq: GOOG) when it comes to its advertising business.
Well, here's another reason that doesn't help: Lead underwriter Morgan Stanley (NYSE: MS) slashed its estimates heading into the historic IPO.
Ouch.
The good news
On one hand, this is actually good news. Not for Facebook, but as a positive sign that not all big banks are quite as evil as Goldman Sachs (NYSE: GS), which also happened to be a major underwriter below Morgan Stanley. Big banks are required to have firewalls to separate their investment-banking divisions, sell-side analyst research departments, and proprietary trading desks, so that the inherent conflicts of interest within the businesses don't intermingle.
Say what you will about doubting whether or not these firewalls are implemented to full compliance (and I won't argue with you), but this move by Morgan Stanley actually affirms that its analysts really are trying to be objective, especially at a time when the bank should be talking up the deal.
The bad news
Morgan Stanley analyst Scott Devitt reduced his revenue forecasts during the investor roadshow ahead of the offering, which is odd considering Morgan Stanley's role. Devitt cut his second-quarter and full-year revenue estimates, largely because of Facebook's amended S-1 filed on May 9 that used gloomier language related to its mobile risk factor. It's unclear what his exact estimates were, but they were definitely lower.
Facebook believes its advertising revenue will be under pressure as users shift to mobile platforms that are largely non-monetized relative to its desktop platform. I say "gloomier" because Facebook was already rather gloomy on its mobile prospects, even in its first S-1.
For example, this is taken directly from its first S-1 filed on Feb. 1:
We had more than 425 million MAUs [monthly active users] who used Facebook mobile products in December 2011. We anticipate that the rate of growth in mobile users will continue to exceed the growth rate of our overall MAUs for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. Although the substantial majority of our mobile users also access and engage with Facebook on personal computers where we display advertising, our users could decide to increasingly access our products primarily through mobile devices. We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven. Accordingly, if users continue to increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, our revenue and financial results may be negatively affected.
Source: S-1 Registration Statement filed February 1. Emphasis added.
Facebook started displaying sponsored stories in mobile news feeds in March to begin trying to monetize mobile users, and the amended S-1 filed on May 9 really only updated some metrics for the first quarter and added one meaningful sentence within this particular risk factor:
We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered.
Source: Amended S-1 Registration Statement filed May 9.
It also added this nugget to the risk factor on how Facebook prioritizes innovation and user engagement over short-term financial results:
As an example, we believe that the recent trend of our DAUs increasing more rapidly than the increase in the number of ads delivered has been due in part to certain pages having fewer ads per page as a result of these kinds of product decisions.
Source: Amended S-1 Registration Statement filed May 9.
So while the May 9 amendment that led to Devitt's reduced estimates spelled out Facebook's mobile risks a little more clearly, there wasn't really anything that we didn't already know.
The list grows
This update was supposedly disseminated to the bank's "major clients," one of which actually went ahead and bought shares in the IPO allocation, sold them immediately, and went short on the first day. One of the funds that received Morgan Stanley's update called the move particularly "unusual" for a book runner so close to the IPO.
We can now add this as another reason Facebook's IPO has been a disappointment for investors: Its lead underwriter bashed its prospects just days before the offer. Looks like that firewall is working after all.
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