Facebook (FB) Warned You About Weak Q2 Three Times
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Media and regulators have grasped onto the fact that analysts at the underwriters of the Facebook (Nasdaq: FB) IPO, including lead underwriter Morgan Stanley, lowered estimates just ahead of the IPO and selectively gave the information to their most valued clients. While this may be true, everyone -- including the most novice of investors -- was given information that the second quarter wasn’t shaping up well. The fact is investors both smart and dumb ignored the warning and wanted the stock anyway.
As early as May 9th, or nine days before the IPO, Facebook gave an update in its IPO prospectus on the second quarter. While the company didn't give specific numbers, the warning was pretty straight forward.
"Based upon our experience in the second quarter of 2012 to date, the trend we saw in the first quarter of DAUs increasing more rapidly than the increase in number of ads delivered has continued. We believe this trend is driven in part by increased usage of Facebook on mobile devices where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having fewer ads per page as a result of product decisions."
The company also referred investors to Risk Factor:
"Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results."
"We had 488 million MAUs who used Facebook mobile products in March 2012. While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. We have historically not shown ads to users accessing Facebook through mobile apps or our mobile website. In March 2012, we began to include sponsored stories in users’ mobile News Feeds. However, 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. 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. If users 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, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected."
The company also repeated this warning in amendment No. 7 on May 15th and on amendment No. 8 on May 16th.
Following the warning, and maybe a call from Facebook execs, analysts at the underwriters took down their numbers:
Here were cuts from the major underwriters (from Reuters):
Q212 Revenue Estimates:
Smart investors, whether retail or institutional, given the guidance from Facebook, should have take down their own assumptions after the warning. A 3-5 percent adjustments would have been appropriate given the warning, whether implicit or explicit.
Many, especially the most sophisticated, did take down their own assumptions -- they didn't need help from the underwriters to do it.
The fact is, even with the warning and lower numbers, they wanted the stock. "It's Facebook for goodness sake! We have to have it!"
These 'smart' and 'novice' investors let their emotions get the better of them. They put in their orders, the underwriters saw the demand, raised their offering size and deal price and the rest was history.
So while investors can point fingers, there are really three reasons the stock is down:
Hype: The deal was simply over-hyped and this can partly be blamed on the nature of the company. Facebook is the core of the social internet. The buzz among media and buzz among friends and the positive feedback loop this created was the ultimate hype machine.
Second Markets: Billionaire Mark Cuban touched on this Thursday, but we highlighted it in our IPO preview. Essentially because shares were liquid on the secondary markets like SharesPost and SecondMarkets, the liquidity premium usually given to an IPO was already in the valuation.
Botched IPO: Nasdaq (Nasdaq: NDAQ) dropped the ball. The delayed IPO open, delayed execution reports and bad prices, created confusion and contributed to an overall bad IPO.
As early as May 9th, or nine days before the IPO, Facebook gave an update in its IPO prospectus on the second quarter. While the company didn't give specific numbers, the warning was pretty straight forward.
"Based upon our experience in the second quarter of 2012 to date, the trend we saw in the first quarter of DAUs increasing more rapidly than the increase in number of ads delivered has continued. We believe this trend is driven in part by increased usage of Facebook on mobile devices where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having fewer ads per page as a result of product decisions."
The company also referred investors to Risk Factor:
"Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results."
"We had 488 million MAUs who used Facebook mobile products in March 2012. While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. We have historically not shown ads to users accessing Facebook through mobile apps or our mobile website. In March 2012, we began to include sponsored stories in users’ mobile News Feeds. However, 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. 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. If users 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, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected."
The company also repeated this warning in amendment No. 7 on May 15th and on amendment No. 8 on May 16th.
Following the warning, and maybe a call from Facebook execs, analysts at the underwriters took down their numbers:
Here were cuts from the major underwriters (from Reuters):
Q212 Revenue Estimates:
- Morgan Stanley: to $1.111 billion from $1.175 billion
- Bank of America: to $1.100 billion from $1.166 billion
- JPMorgan to $1.096 billion from $1.182 billion
- Goldman Sachs to $1.125 billion from $ 1.207 billion
- Morgan Stanley: to $4.854 billion from $5.036 billion
- Bank of America: to $4.815 billion from $5.040 billion
- JPMorgan: to $4.839 billion from $5.044 billion
- Goldman Sachs: to $4.852 billion from $5.169 billion
Smart investors, whether retail or institutional, given the guidance from Facebook, should have take down their own assumptions after the warning. A 3-5 percent adjustments would have been appropriate given the warning, whether implicit or explicit.
Many, especially the most sophisticated, did take down their own assumptions -- they didn't need help from the underwriters to do it.
The fact is, even with the warning and lower numbers, they wanted the stock. "It's Facebook for goodness sake! We have to have it!"
These 'smart' and 'novice' investors let their emotions get the better of them. They put in their orders, the underwriters saw the demand, raised their offering size and deal price and the rest was history.
So while investors can point fingers, there are really three reasons the stock is down:
Hype: The deal was simply over-hyped and this can partly be blamed on the nature of the company. Facebook is the core of the social internet. The buzz among media and buzz among friends and the positive feedback loop this created was the ultimate hype machine.
Second Markets: Billionaire Mark Cuban touched on this Thursday, but we highlighted it in our IPO preview. Essentially because shares were liquid on the secondary markets like SharesPost and SecondMarkets, the liquidity premium usually given to an IPO was already in the valuation.
Botched IPO: Nasdaq (Nasdaq: NDAQ) dropped the ball. The delayed IPO open, delayed execution reports and bad prices, created confusion and contributed to an overall bad IPO.
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