Facebook: Is Stock Research Rigged?

Facebook announced its earnings on July 26 after the close of trading. Its share price fell 8.5 percent to 26.845 before the market close in the wake of Zynga's dismal report. Facebook's own report raised questions, and shares fell 10.7 percent to 23.97 (as of this writing) in after-hours trading.

While Facebook claims 955 million active users, that doesn't translate to protected revenues. Its sales increased to $1.18 billion, but it earned only 12 cents per share (adjusted) for the second quarter of 2012. Facebook had a fourfold increase in marketing costs and its operating margin declined to 43 percent from 53 percent last year. It also took a one-time charge for stock-award accounting to post a loss for the quarter of $157 million for an unadjusted loss of 8 cents per share.

Analysts' Rosy Price Targets

ZeroHedge.com shows that stock analysts--including analysts whose firms made handsome fees for participating in Facebook's May 17th IPO -- had recent average price targets of $37.74 for Facebook. This is just below the IPO price. Only one of 38 analysts had a sell recommendation on Facebook.

How do these "analysts" justify a multiple that is higher than 95 percent of the stocks in the S&P 500? It seems that either analysts are compromised, or they are painting overly optimistic scenarios based on nothing more than hope. It's interesting that their hopes are aligned with the hope some of their firms have for future fees.

Over-Hyped IPO

After Facebook's May 17th IPO, I made a public bearish bet on Facebook. I made a bet it would fall in value, or at least that sentiment would turn negative. I took a profit on the bet in June. If I had failed to monetize at a profit, I could have called JPMorgan CEO Jamie Dimon to claim it was a hedge, since he had the nerve to pull that one when he appeared before Congress to explain billions of dollars in losses on credit derivatives bets in his London CIO unit. (Dimon later admitted it changed into something else, i.e., a bet.)

Facebook's IPO was emotion in motion. It seemed to me the pricing was based on hot air. At the time Facebook had $3.7 B in annual revenues of which 85 percent came from advertising, and it had only $1 billion in net income.

In my opinion, the game was to bring the IPO at an inflated value and hope Facebook can acquire viable companies with its inflated shares. It's a game of brinkmanship. The investment banks that helped inflate Facebook's share price may stand to earn fees as Facebook acquires other companies. Unfortunately, the fall in value puts a damper on these plans.

On May 30, 2012, I discussed Facebook's inflated value with Bloomberg TV:

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Structured Finance & Collateralized Debt Obligations (Wiley, 2003, 2008), and Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009), a book about early warnings and the causes of the global financial meltdown. Her new e-book is The New Robber Barons (2012).