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Facebook: Are Investors Going To Reap A Rich Harvest?

 May 07, 2012 03:26 PM


(By R. Chandrasekaran) As social network site Facebook hits the road to promote its IPO, views are emerging in favor as well as against participating in the IPO. Analysts have gone a step ahead in projecting the stock as Outperform.

If the reports are given serious thought, the mood seems to be upbeat in favor of Facebook drawing tremendous response to its IPO; although, skeptics believe the stock is not worth risk for the long term.

Last Thursday, the company set a price range of $28 - $35, valuing the company between approximately $76 and $96 billion. Facebook intends to raise a maximum of $12 billion. At least $4.9 billion worth of stocks has been reserved for insiders and the balance of about $5.6 billion will be raised from the public.

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The available stock for the public, which is likely to be half of total IPO issue, could push demand to exceed the supply. Analysts predict the company will price its stock at the upper end of the price range, which is $35.00.

During the road show, the company is addressing concerns raised on slowing ad revenues, the Zynga factor and mobile apps. There are concerns about the valuation of Facebook. Some analysts believe that the current line of business cannot justify the valuation. However, there is a sense of belief that the company could find more opportunities for revenue growth than they have now.

Meanwhile, Wedbush has reportedly initiated coverage of Facebook stock with an Outperform rating with a price target of $44. The stock is likely to start Nasdaq trading on May 18 under the symbol FB.

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At the top end of the price band of $35, what will be the return for investors when its shares are listed? Assuming a conservative opening price of $40,  this will fetch a return of 14.3 percent to investors on day one. Similarly, at the lowest price band of $28 and a first tick at $40, the return will be a whopping 42.9 percent.

What will happen if the stock quotes less than the top end of the price band? Assuming an offering price of $35, and a listing price of $34, investors might lose about 2.9 percent. If FB starts trading at $31 or $30, then there will be erosion of capital by 11.4 percent and 14.3 percent respectively.

Similarly, if the stock is priced at $31, slightly below the mid-point price range, and the listing price is $40, then investors would gain 29.03 percent. Likewise, if the stock is priced at $32 and listing price is $40, then investors would benefit by 25 percent.

However, all the calculations could go awry if the market sentiments turn weak on concerns over European Union's capability to manage its financial crisis. This apart any weak economic indicator from the U.S. could also upset the calculations. However,  given the current mood, the odds are in favor of Facebook. 

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