View from the dealing floor.
Tom Fawcett works on IG's dealing floor in London. To find out more about CFDs, spread betting and shares visit: http://www.ig.com/uk/trading-cfds
The Facebook IPO on May 18, 2012 was billed as one of the biggest flotations in history, with most analysts predicting the market cap coming in above $100 billion– more reminiscent of the '.com boom' than the fifth year of a deep recession. However, it will not be a day that founder/CEO Mark Zuckerberg will want to dwell on.
A sell-off on equity markets the previous day had already lowered expectations from the $40 top-end estimate, and, on the day, technical issues dogged the first few hours of trading on the Nasdaq, and the stock only just clung on to close above its $38 IPO price, leading to accusations that the underwriter Morgan Stanley had offered too much stock at too high a price.
The stock was trading $5 lower at one point the next day and hit rock bottom in September recording a low of $17.73.
A year later and the dark days of last summer are all but forgotten. In July, Facebook trumped analysts' estimates with its second quarter earnings, reporting revenue up 53% year-on-year, driven by strong growth in advertising income from its mobile offering. The firm is striving to make its mobile app the medium of choice for its 1 billion users, so this was music to an investor's ears.
Research firm eMarketer predicts that Facebook will increase mobile ad revenue four-fold to $2 billion this year, giving it a 13% share of the market. When these numbers were released the stock soared 17% in after-hours trading and has gone from strength to strength ever since, recently recording an all-time high of $46.55 – valuing the company at more than $110 billion. The stock is up 60% in 2013 against a 17% rise in the benchmark Nasdaq 100 which itself recorded its highest close (3231.31) since 2000 on September 18.
So where next for Facebook? With the share price trading at an $8 premium to the IPO price is this an opportunity for early investors to finally realise some profits, or will funds view these bullish results as a signal to increase their holdings further?
JP Morgan and RBC have both increased their price targets (to $53 and $52) this month, rating the stock 'overweight' and 'outperform' respectively. However, there are sceptics out there, when Pandora Media announced an unexpected 111% rise in mobile ad revenues earlier this year, it was received negatively by some analysts. Mobile advertising is still a lot cheaper than conventional desktop advertising, meaning that firms need to sell more of it, on a medium that already has less display space to achieve the same revenues. To make space for this advertising, firms have to sacrifice some of the content that their users are visiting them for, making the product less attractive and therefore less desirable to advertisers.
Whatever the future holds for Facebook, in order to justify the triple digit P/E ratio it currently boasts it will need to continue wowing expectations with its earnings. One key bellwether of future performance will be the forthcoming Twitter IPO. Twitter will hope to avoid the problems that marred the Facebook IPO and emulate professional networking site LinkedIn, whose share price more than doubled on the IPO date. Although no date has been set yet, speculation is already fierce.
IG is offering a grey market on Twitter's market cap at the end of the first day of trading. After starting with a price at the lower end of estimates 110/115 (priced in $100 million), IG has ramped up their price after seeing a torrent of buying. It currently stands at 162/167 having reached highs above 180.
It seems sentiment is positive surrounding Twitter–for the moment at least.
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