Bloomberg News

Facebook Closes Above $38 IPO Price Amid Mobile Ad Gains

August 03, 2013

Facebook

A Facebook "Like" button sits on a wall display beside clocks inside Facebook Inc.'s new data storage center near the Arctic Circle in Lulea, Sweden. Photographer: Simon Dawson/Bloomberg

Facebook Inc. (FB:US) Chief Executive Officer Mark Zuckerberg keeps telling investors he’s building a “mobile first” company. They finally got the message, sending the shares to the highest close since their debut trading day.

Facebook rose 1.5 percent to $38.05 yesterday in New York, a closing price not seen since the social-networking company’s May 18, 2012, initial public offering. The stock had tumbled to a low of $17.55 in September, less than half the $38 IPO price.

The milestone underscores Zuckerberg’s recovery from one of the worst IPOs in a decade, with a mobile-ad business that’s now on track to propel sales (FB:US) to more than $16 billion by 2017. After absorbing ridicule and litigation in the wake of its botched debut, Facebook is winning over shareholders and advertisers with its mobile strategy -- and cementing its position as a fast-moving competitor to Google Inc. (GOOG:US) and others.

“The question today is, is the business now strong enough for a $100 billion valuation?” Youssef Squali, an analyst at Cantor Fitzgerald, said in an interview. “This is what the $38 IPO price implied and, yes, they have proven that they deserve that kind of valuation considering their successful move to mobile over the last three to four quarters.”

The stock rally may reward some individual investors who saw their dreams of riches vanish along with hundreds of millions in market value within days of the IPO, as well as institutional holders such as T. Rowe Price Group Inc. and Vanguard Group Inc. that hold big chunks of Facebook stock, according to data compiled by Bloomberg.

Zuckerberg’s Gains

The rise also boosts the wealth of Zuckerberg, 29, who founded the social-networking company in 2004 while at Harvard University. Zuckerberg ranks above Microsoft Corp. CEO Steve Ballmer and Dell Inc. founder Michael Dell on the Bloomberg Billionaires Index, according to data compiled at the end of trading yesterday. Zuckerberg is No. 37 with a net worth of $18.6 billion, the data show. His fortune has swelled 52 percent this year.

Ashley Zandy, a spokeswoman for Facebook, declined to comment.

A Facebook comeback seemed unlikely through the summer of 2012, when concerns around the Menlo Park, California-based company’s ability to make money from the growing use of its service on tablets and smartphones sent shares tumbling and cut its valuation in half.

Shareholders Vent

The issue was compounded by the high portion -- more than 25 percent -- of buyers in its IPO who were retail investors, many with little experience buying stocks. Dealt with more than $600 million in losses in the first week of the offering, mom-and-pop shareholders took to social media to vent their displeasure with the company. Others sued Facebook, Nasdaq OMX Group Inc. and the underwriters, claiming they were misled.

Zuckerberg responded by shifting development toward mobile software and charging marketers to show messages in the news feed of users’ wireless devices. In an interview at a technology conference in September 2012, during the depths of the stock-price plunge, the CEO called the stock performance “disappointing” even as he outlined his new strategy.

“Now we are a mobile company,” Zuckerberg said at the conference, hosted by the blog TechCrunch. “We know that we’re going to do well on that. There’s a huge opportunity. Now the question is getting there.”

Mobile Momentum

Over the next 10 months, Facebook released a steady stream of new ad offerings tailored to the smaller screens, which began to lure advertisers and reassure investors. The stock rallied gradually until July 24, when the company reported second-quarter profit and revenue topping analyst estimates. Zuckerberg also said mobile ads generated 41 percent of sales, up from 14 percent a year earlier, sending shares of Facebook soaring 30 percent for their highest one-day gain on July 25.

“The big worry after the IPO was moving to mobile after desktop,” said Giri Cherukuri, a portfolio manager at Oakbrook Investments LLC in Lisle, Illinois. “That’s not a worry anymore.”

Oakbrook waited out the IPO, buying into Facebook in June 2012 after the company was added to the Russell 1000 Index, Cherukuri said in an interview. The fund currently owns about 43,600 Facebook shares.

“Mobile’s given it a lot of momentum,” Cherukuri said.

In his latest advertising push, Zuckerberg plans to sell TV-style commercials that marketers can broadcast into a user’s news feed, people familiar with the matter said this week.

‘Great Rebound’

Facebook faces challenges in keeping up the momentum, including a fast-changing digital advertising landscape and nimble competitors including Twitter Inc.

That Zuckerberg was able to engineer a turnaround in such a short time nonetheless shows he can listen to criticism and change strategy when needed, said Brian Wieser, an analyst at Pivotal Research Group LLC.

“Facebook had such a great rebound and this last quarter proved everything we’ve been saying about mobile,” said Wieser, who has a buy rating on the shares.

At a market capitalization of more than $90 billion, Facebook is now trading at more than 160 times earnings. That’s more expensive than all but five companies in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. A higher ratio can signal that investors think the company may report stronger earnings growth in the future.

Continued Rally

Even after closing above the IPO price, the rally may continue. Analysts at Goldman Sachs Group Inc. have a $46 target price on the shares, while at least 11 others set targets (FB:US) of more than $38, according to data compiled by Bloomberg.

Renee Morrison, director of client services at Empyrion Wealth Management in Roseville, California, bought 100 shares of Facebook at $38 apiece on the first trading day. Disappointed by negative media attention at the time that she blames for the stock’s decline, Morrison still kept her stake.

“I would love for it to go like Google and some of the other larger technology companies,” Morrison said in an interview. “It would be kind of cool if it doubled. I’ll just let it ride to $50 and decide from there.”

To contact the reporters on this story: Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net; Callie Bost in New York at cbost2@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net


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Companies Mentioned

  • FB
    (Facebook Inc)
    • $76.11 USD
    • 1.42
    • 1.87%
  • GOOG
    (Google Inc)
    • $504.89 USD
    • 9.50
    • 1.88%
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