CMC Markets Report: Facebook IPO Anniversary

The first anniversary of the Facebook IPO is fast approaching. For some this may dredge up memories they would prefer to leave buried, but for other traders, it presents a chance to reflect on the opportunities that emerged over the past year and what the coming year may bring.

Within the report Colin Cieszynski looks at:

• Facebook’s share performance a year on from its IPO in comparison to other major internet IPOs
• Why Facebook’s shares could see an improved second year, building on their 28.1% gain since September 2012

Facebook trading year 2.0 outlook May 2013

Facebook’s fall from grace so quickly after its IPO was disappointing, but not uncommon. The chart below shows that, with the exception of Google, many major internet IPOs over the last decade started out slow. Excluding Google, Facebook’s performance to date has been in the middle of the pack, not performing as well as Baidu or LinkedIn, but not as poorly as Groupon or Zynga either.

Source: CMC Markets, Bloomberg (raw data)

Although year one records have varied following these big IPOs, second year performance tended to be generally positive. There are several possible reasons for this.

Firstly, an end to share supply increases can have a positive impact. The first anniversary of an IPO usually coincides with the end of private share lockup. In the case of Facebook, the last 47 million shares became free trading on 18 May 2013, but this represents only 2.6% of the 1.74 billion shares outstanding.

Secondly, there is the potential for increased demand from index tracking funds such as ETFs. Facebook has already become a member of the NASDAQ 100, and with a recent $69 billion market cap, appears to be a strong candidate for inclusion in the S&P 500 and other large cap indices over time. Addition to an index can increase interest from funds who would be forced to take on positions in order to keep their basket on track with their benchmark. 

Thirdly, capital raised for investment in new initiatives has the potential to start paying off over time. In the case of Facebook, traders remain focused on the growth potential of the mobile business. Mobile revenues have been growing over the last year and the potential for growth is expected to accelerate following the launch of Facebook Home and the first HTC smartphone.

Finally, as a company’s IPO fades into memory it starts to build a track record as a public company, giving analysts more data to build realistic valuations and models. Traders can also gain more experience with how the shares trend and react to news. Managements may also become more comfortable with the dos and don’ts of running a public company over time, or they may step aside, as we recently saw at Groupon. 

After its big sell-off last summer, Facebook’s performance as a public company has improved. Since September 2012, it has gained 28.1%, which is above the average for its peer group and similar to Pandora and Groupon.

Facebook has been valued in the marketplace lately at about 46.3x street forecast earnings, which is above the average for its peer group. After adjusting for its growth rate, it has a P/E to growth ratio of 1.74, which is moderately above the 1.56 group average, and is less than Yahoo! and LinkedIn.

Overall, some may consider Facebook a bit pricey and it could be vulnerable should sales and earnings growth fall short of expectations, particularly on the mobile side of the business. That being said, its valuation doesn’t appear to be as high as the nosebleed levels of a year ago. Meanwhile, expectations have come down from overhyped IPO levels, suggesting that this time around there could be greater opportunities if the company is able to deliver on its promise.