After 40 days and 40 nights on rough seas, we’re about to find out if Facebook Inc.’s Wall Street partners are still on board.
The 40-day “quiet period,” under which underwriters of an initial public offering are barred from publishing research opinions on the stock, expires Wednesday. That means the 30-plus investment banks that were in the underwriting syndicate for the $16-billion (U.S.) IPO – a veritable who’s who of Wall Street’s most powerful firms – are expected to unleash a torrent of reports analyzing Facebook’s stock and the company’s business prospects, weeks after the stock’s disappointing debut raised questions about whether the underwriters disclosed sufficient information to investors.
Market watchers said we can expect the recommendations on the stock to be tilted toward the positive – something the stock market may already have anticipated.
“The past few trading days, the stock has gone up – not for any fundamental reason,” said Scott Sweet, head of IPO Boutique, an IPO-focused investment advisory firm based in Florida. “There’s an expectation that we’re about to see several outperform [recommendations], and maybe even some strong buys.”
Despite investment banks’ protestations that their equity research is separate and fully independent from their underwriting businesses, history suggests that research from IPO underwriters is typically skewed toward the bullish. Ipreo, a New York-based market intelligence firm, published a report last year showing that out of 700 U.S. IPOs it looked at from 2006 to 2011, only seven received “sell” ratings on average from analysts that initiated coverage in the two weeks following the quiet period. And all but one of those stocks had gained 50 per cent or more from their IPO price.
The tendency for underwriters to be bullish on the stocks they’ve helped sell could boost Facebook’s stock price in the short term.
“It will inevitably contribute to positive sentiment,” said analyst Brian Wieser of Pivotal Research in New York, adding that not only the underwriters but Facebook itself are now free to talk about the company’s prospects. “It allows for positive news flow to enter the market.”
To date, 19 analysts, all outside the underwriters’ group, have issued recommendations on Facebook’s shares. Ten rate the stock a buy, versus seven holds and two sells.
The sell recommendations have fallen as Facebook’s stock price retreated drastically from its $38 IPO price last month. Analysts have looked more favourably on the stock at lower price levels, but the average 12-month price target is only a hair above the IPO price, at $38.
“The stock fell enough, eventually you had to [drop the sell recommendation],” said Mr. Wieser, who upgraded his call on the stock to a hold from sell at the end of May. His price target has remained at $30, which is below Tuesday’s closing price of $33.10.
“It’s still a great company, at the right price,” he said. “But it’s a business that has a lot of uncertainty.”
The big question remains whether Facebook will be able to generate advertising revenues from the growing number of users who are accessing its social-network site from mobile devices, an area where the company to date has captured no meaningful revenues.
With evidence this year that Facebook’s growth in its user base has slowed, analysts consider it crucial that the company show that it is converting its existing users into increased revenue streams.
The latest data on Facebook’s audience have done nothing to quell the market’s doubts about its growth. Last week, research firm comScore reported that Facebook’s number of unique visitors fell for the second straight month in May, and are up less than 1 per cent from a year ago.
Mr. Sweet said that given the underwriters’ close connections with the company, investors are hoping their analysts will have deeper insight into the company’s efforts to step up its advertising revenues.
“They’ll certainly be looking for anything about whether Facebook has wrapped its mind around advertising on the mobile side,” he said. “Their subscriber base is slowing. They’ll have to balance that by monetizing the advertising side.”