Three Small-Cap Alternatives to the Facebook IPO
Social-networking leader Facebook is expected to price its giant IPO on May 17, with the stock beginning to trade on the Nasdaq Stock Market the following day under the ticker symbol "FB." The preliminary price range for the shares has been set at $28 to $35 apiece. At the high end of the preliminary price range, Facebook would hit the public markets with a valuation of $96 billion, similar to the size of global blue-chips such as McDonald's (NYSE: MCD) and Pepsico (NYSE: PEP).
Currently, indications about demand for Facebook shares are mixed. Reuters reported on Friday that the IPO is already oversubscribed, but according to Bloomberg, demand is actually tracking below expectations. Heading into the company's big week, however, it is obvious that there is some controversy about the potential valuation of the tech outfit which was founded in 2004 by Mark Zuckerberg.
In its piece, Bloomberg quotes a number of investors who voiced serious concerns about the company's growth prospects versus Facebook's potential market-cap in the wake of this week's mega-IPO. Filippo Garbarino, who oversees $50 million at Frontwave Capital Ltd. in Chiasso, Switzerland told Bloomberg that he thinks the company is overvalued at the preliminary IPO price and that “Investors are becoming more selective and there are quite a few fallen angels around, like Netflix. Those who buy Facebook at these levels are more speculators than investors.”
The deal is expected to bring Facebook, along with its existing investors, up to $11.8 billion. The company itself is selling 180 million shares while existing owners such as Accel Partners, Goldman Sachs, and Digital Sky Technologies are offering 157.4 million shares. According to Bloomberg, "lackluster interest from institutional investors at this stage could compel the company to rely more on buying from retail investors, whose demand remains robust, people said."
Bloomberg also noted that 79 percent of respondents in a poll it conducted said that the company did not deserve to be valued at the high-end of its initial price range. The polling data was based on the responses of 1,253 investors, analysts, and traders who are Bloomberg subscribers. On the other hand, Reuters reported that "institutional investors have so far indicated demand for more shares than Facebook has available," according to a source.
Although it is yet unclear just how much demand there is for FB shares, and where the IPO will be priced, market participants should anticipate continued debate over the value of the company, and potential volatile trading on Friday when FB debuts.
“Expectations on Facebook are way too high,” said Mitsuo Shimizu, a market analyst at Tokyo-based Iwai Cosmo Securities Co. “Given its fundamentals, the company doesn't look anywhere cheap in valuation.” Facebook is looking to be valued at around 24 times its revenues versus just 5 times for Google (NASDAQ: GOOG), when it went public in 2004.
While Google has been a major winner, rising more than 458% since going public, it may be difficult for FB to provide IPO investors with similar returns due to slowing growth and a super-premium valuation from the very beginning. On May 9, Facebook said that advertising growth hasn't kept pace with the increase in the company's users. Bloomberg also reported that Facebook is telling analysts that it may not meet their bullish sales projections.
The bottom-line on the Facebook IPO-frenzy? It could be a dud, and cautious long-term investors may want to wait a few quarters before jumping into the stock. Fortunately, there may be some other stocks that could benefit from the Facebook hype this week. Investors and traders who are looking at the Facebook deal with a skeptical eye, but wouldn't mind riding a related stock which is bouncing on the back of the IPO hype, should consider the following names.
Quepasa Corp. (AMEX:QPSA) - This company bills itself as a "global tri-lingual social community for the latino audience featuring new friends, games, contests, flirting, pictures, communities, video, and more." The company has had a rocky history, and one of its major investors in the past was Florida Governor Rick Scott. In November 2011, Quepasa merged with myYearbook.com.
The small-cap stock has been under significant pressure over the last year, and has lost more than 40% of its value during this time. Year-to-date, however, QPSA shares have risen a little better than 10%. Over the last 52-weeks, QPSA has traded in a range between $2.74 - $10.42 and closed Friday's trading session at $3.66. While the stock remains in a long-term downtrend, it is possible that Facebook's IPO will bring added attention to the company this week, which could potentially catalyze a spike in its stock price. The company only has a market-cap of just under $133 million, so it won't take much buying interest to generate a rally in the name.
Renren, Inc. (NASDAQ: RENN) - In the past, this company has been billed as the "Facebook of China," but the performance of the company has not lived up to that moniker. Renren operates a social networking Internet platform in the People's Republic of China. The company's platform "enables its users to connect and communicate with each other, share information and user-generated content, play online games, listen to music, shop for deals and a range of other features and services."
Over the last year, RENN shares have been hurt by a spate of fraud uncovered in the Chinese small-cap space, and the stock has lost nearly 57% of its value. While Renren itself has never been accused of any wrongdoing, the taint of potential impropriety has touched a large number of Chinese companies listed on U.S. exchanges. The 52-week range in RENN is $3.21 - $14.80. On Friday, the stock closed at $5.69.
While the last year has been tough on RENN, which has a market cap of roughly $2.2 billion, the stock has been rallying in 2012. Year-to-date, shares are up more than 60%. Over the last 5 trading sessions, however, RENN shares have fallen more than 15%. It is possible that excitement about Facebook's IPO could cause the near-term sell-off in RENN shares to reverse itself in the coming week. The shares have been active in light of announcements from Facebook in the past, and this week will likely be no different.
Izea, Inc. (PINK:IZEA) - This is a very small stock which started to show some high-volume trading activity last Thursday and Friday heading into Facebook's much anticipated IPO-week. The company has a market-cap of just $25 million, but has seen its stock price soar more than 148% over the last 5 trading sessions. On Friday, volume exploded with more than 2.6 million IZEA shares trading hands compared to a 3-month daily average of 184,000. The stock closed Friday's trading session up another 28% to $0.645.
The pinksheet company describes itself as "a marketplace for consumer generated advertising, connecting advertisers with social media publishers, such as bloggers, tweeters and others in order to develop and distribute content throughout the blogosphere and social networks." In particular, the company's goal is to allow anyone with an online presence to monetize their social media activity by connecting them with relevant advertisers. Although not a company for most investors, its unusually high volume put it on the list to watch this week.
As companies continue to grow their social media advertising budgets, IZEA revenue model could change. The company's business model puts it within the Facebook ecosystem, as Izea helps users monetize their Facebook content through relationships with advertisers. The activity in the stock last week is likely related to its recent earnings announcement that included upside revenues guidance, in addition to the building excitement over this week's Facebook IPO. Traders and investors looking to catch a Facebook-related bounce in a highly speculative stock may want to keep IZEA on their radar screens this week. Nevertheless, IZEA does have a long history of financing deals and, to date, has not been able to achieve profitability.
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