Facebook Falls Below Its IPO Price

(Updated with Monday’s closing price.)

Less than an hour into only its second day of trading, 88 million shares of Facebook (FB) had changed hands and the price was down 12 percent from Friday’s close of $38.23. (The shares closed Monday at $34.03.) In other words, you could buy this most anticipated of initial public offerings at a substantial discount from the price that Wall Street reserved for its preferred clients.

With a valuation of $104.8 billion at the May 18 close, Facebook was already worth more than three times the other 10 U.S. consumer Internet companies to have gone public in the past year; LinkedIn (LNKD), valued at $10.3 billion, is second.

“IPOs are scary things,” says blogger and newsletter writer Eddy Elfenbein. “It’s hard to justify Facebook going for sixty times” next year’s estimated earnings, he adds, “in a market where Apple (AAPL) is going for less than 10 times next year’s estimate.”

So what price can be justified? Elfenbein calculates that Facebook’s estimated 2013 earnings of $1 a share, combined with its projected 50 percent earnings growth rate for the next five years—and there’s no guarantee the company will meet those estimates—give it a fair value of $33 a share. Even so, he says buying the stock would be prudent only at closer to $23.

You may get that chance. Another analyst, PrivCo’s Sam Hamadeh, points to concerns about Facebook’s fundamentals: declining first-quarter advertising revenue; the number of unique visitors to Facebook dropping in the U.S.; the company warning in its most recent S-1 filing that the shift to mobile access vs. desktop access could complicate its ad business. He also anticipates a wave of new stock hitting the market once insiders are free to unload their holdings, and predicts that others will sell to raise money to pay taxes on their gains.

“When you factor in that the lockup expires in November and tax-related selling, we think the shares, once the hype dies down, will be in the $20s by yearend—$24 to $25 per share,” Hamadeh told peHUB.

If Zuckerberg & Co. should want consolation, they need look no further than Google’s (GOOG) 2004 initial public offering. Few remember that the king of Internet search actually had to slash the price of its shares well below its earlier targets. It ultimately IPO’d at $85, which was far lower than management’s earlier indicated range of $108 to $135. And though GOOG did enjoy a nice Day One pop, it went to nowhere and back for the better part of a month—before more than quintupling in less than four years.

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Groupon's Drop Below IPO Price Reflects Daily-Deal Risks

January 04, 2012, 10:45 PM EST By Ari Levy and Danielle Kucera

Jan. 4 (Bloomberg) -- Groupon Inc.’s shares, which have fallen below the company’s initial public offering price, show that both merchants and investors are having second thoughts about the nascent daily-deal industry.

About half the businesses that have offered an online deal- of-the-day in the past aren’t planning to do so again in the next six months, according to a survey published on Jan. 2. The study, by Susquehanna Financial Group and daily-deal aggregator Yipit, showed that merchants were concerned about a low rate of repeat business from new customers gained through such offers.

“The risk factors are enormous” for daily-deal companies, said Sucharita Mulpuru, an analyst at Forrester Research Inc. in Cambridge, Massachusetts. “Their cost of merchant acquisition is going to get higher over time.”

To keep growing, the industry, which researcher BIA/Kelsey estimates may more than double to $4.17 billion by 2015, will probably agree to charge businesses less. Groupon, in fact, said in a June IPO filing that offering merchants more favorable terms may cut into its profits.

Margins are already shrinking. The amount of billings Groupon booked as revenue narrowed to 37 percent in the third quarter from 42 percent in the prior period and 44 percent in the first quarter. Chicago-based Groupon attributes the decline to getting into new products, such as travel and event tickets.

The company’s shares slipped 2.6 percent to $18.77 at 1:01 p.m. New York time. Yesterday, Groupon dropped 6.6 percent after the release of the Susquehanna and Yipit survey, which collected data from more than 100 merchants. This week marks the second time that Groupon stock has fallen below the $20 IPO price since its Nov. 3 debut.

Merchant Feedback

Groupon is the biggest Internet-deal provider, delivering discounts on restaurants, hotels, spa treatments, and other goods and services. Rivals include Washington-based LivingSocial and Seattle-based Amazon.com Inc., and Groupon also lists Google Inc. and Microsoft Corp. as competitors in its prospectus.

While 80 percent of the survey’s respondents were satisfied with daily-deal companies, about 52 percent of merchants said they’re not planning to offer a discount through such sites in the next six months.

“People are scrutinizing it a little more because of all the merchant feedback,” said Herman Leung, a Susquehanna analyst based in San Francisco. He has a “neutral” rating on Groupon’s stock. “About 76 percent of the merchants plan to do zero or one deal over the next six months. They’re seeing sufficient demand on their own as the economy is getting better.”

Julie Mossler, a spokeswoman for Groupon, declined to comment.

Small Business Market

Groupon created the online daily-deal market in 2008 and in the first three quarters of 2011 featured deals from more than 190,000 merchants worldwide, according to its prospectus. That leaves plenty of room for growth, as there were 5.9 million businesses with employees in the U.S. alone in 2009, according to the U.S. Small Business Administration.

Brendan Lewis, a spokesman for LivingSocial, said that even within the Susquehanna and Yipit survey, the numbers are encouraging.

“It shows the vast majority of merchants who have run deals are happy with their experience, and nearly half plan to run another deal in the immediate future,” Lewis said in an e- mail. “You’d be hard-pressed to find an 80 percent satisfaction rate among merchants for any other marketing channel in use today.”

Still, LivingSocial put off its IPO plans last year as Groupon and other Internet companies faced turbulent debuts in the public markets. The company instead lined up $400 million in private funding at a valuation of about $6 billion, a person with knowledge of the matter said in December.

Post-IPO Scrutiny

Staying private has allowed LivingSocial to shore up its finances without the scrutiny of the public markets. Groupon, meanwhile, has been criticized for its ballooning marketing expenses, which have led to rising losses.

The company has more than 10,000 employees, up from 37 in June 2009. It spent $613.2 million on marketing in the first nine months of last year, resulting in a net loss of $238.1 million. Marketing costs will increase in the coming months as stores become less inclined to offer Groupons because they aren’t seeing users return, Mulpuru said.

“It’s been like a marketing blitzkrieg that’s grown the business to the size that it is,” Mulpuru said. “They were using investor money to subsidize these offers for so long. Then what merchants start recognizing is, ‘We’re just not getting new customers.’”

--Editors: Jillian Ward, Nick Turner

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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The Price of Clean Air

By Paul M. Barrett

Illusration by Emily Keegin & Maayan Pearl

The Fisk Generating Station in the working-class Pilsen neighborhood on Chicago's Lower West Side once symbolized the future. The largest of its kind when it opened, the single-stack, coal-fired plant powered factories and residences throughout a growing metropolis.

That was in 1903. Today, Fisk and its slightly younger sister, the Crawford Generating Station, located nearby in another densely packed area, are relics: two of the more than 200 "legacy" coal-burning plants nationwide that were grandfathered in under 1977 amendments to the Clean Air Act. As a result of legislative compromise, these aging plants remain exempt from some of the act's main requirements that industrial facilities use modern pollution control methods.

Living in Pilsen provides a time-travel experience to an era when the air in American cities was grittier and more dangerous. "Around here, you get this thin gray film of dust on your windowpane and on the patio furniture," says Jerry Mead-Lucero, a local activist who lives near Fisk. "A lot of people don't have air conditioning, so the windows are open in the warm weather, and dust gets into your home or apartment."

And your lungs. Fine particulate matter, sulfur dioxide, and nitrogen oxide emitted by the Fisk and Crawford plants exacerbate respiratory and cardiac conditions, according to public health advocates. A study led by a Harvard School of Public Health professor and published in 2002 in the journal Atmospheric Environment linked the two Chicago plants to 41 premature deaths a year, as well as 550 emergency room visits. As if that weren't enough, Mead-Lucero points out, electricity from Fisk doesn't even go to local residents; the grid sends it to customers elsewhere.

Lawmakers gave Fisk, Crawford, and their ilk a Clean Air Act pass based on the expectation that the old plants would soon close anyway because of decrepitude and inefficiency. The act requires that if such plants are modernized, their owners have to bring them up to code. Congress didn't anticipate that some power companies would forgo modernization. "A lot of utilities have used chewing gum, duct tape, and rubber bands to keep the old plants running, while arguing in court that the changes are merely 'routine maintenance,'" says Henry Henderson, Midwest program director of the Natural Resources Defense Council. The nonprofit NRDC has sued—so far unsuccessfully—to try to force Fisk and Crawford to clean up or shut down.

The plants' owner, Midwest Generation, a unit of Rosemead (Calif.)-based Edison International (EIX), says that it cares about the environment and public health. It also says it obeys the Clean Air Act and all other relevant laws. Over the years the company has reduced the release of mercury and certain other contaminants, adds Douglas McFarlan, Midwest Generation's senior vice-president for public affairs. "We have no problem with the rules continuing to get tougher and tougher," he says. "Our analysis shows, though, that even if our plants closed, you would not see a real difference in Chicago. There are a lot of sources of pollution, and you have to look at the situation holistically."

The confounding problem of Chicago's antiquated power plants is more than a local concern. The situation sheds light on a debate unfolding 700 miles away in Washington over whether to step up enforcement of the Clean Air Act or slip back in the direction of Pilsen.

At least 19 Republican-sponsored bills have been introduced in both houses of Congress seeking to prevent the Environmental Protection Agency from taking actions such as limiting emission of climate-warming greenhouse gases and imposing tougher rules for ground-level pollutants such as mercury. Republicans and their industry allies warn that assertive regulation will hurt energy providers like Midwest Generation, killing jobs in a fragile economy. "Left unchecked, EPA's actions would have a devastating impact on jobs, U.S. competitiveness, and domestic energy prices," Representative Fred Upton (R-Mich.), chairman of the House Energy and Commerce Committee, said on Apr. 7 after the House passed legislation he wrote forbidding the EPA from regulating greenhouse gases under the Clean Air Act.

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