Facebook: Recent Past is Not Prologue for the Future, and More Media Wall St. Reports 6/1/12

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Facebook

Well, it's been a wild ride for investors in Facebook (FB). The social network's $16 billion IPO two weeks ago so far stands as its greatest achievement. After pricing at $38, it's been nowhere but down for the stock, slumping over 30%. As the smoke is clearing, fingers are being pointed in various directions to assign blame.

So, what really went wrong? There seem to be four schools of thought here:

Human nature happened: From this perspective, the crowd's high expectations tanked the IPO from the start. "The Facebook debacle is a textbook case of the collision between human needs and the nature of financial markets…The mass psychology of this IPO was that of a classic mania. And that meant a multitude of problems were rendered invisible…referring to two critical and related issues: timing and valuation assumptions." (Wall Street Journal).

Stock market glitches: NASDAQ, the stock market where Facebook listed its shares, is under a lot of heat from market makers, some of whom lost tens of millions of dollars on the bungled IPO. A series of technology glitches and communications breakdowns marred the IPO, leaving the market makers in the dark as to which trades settled, when, and at what price. "The Nasdaq has just handed the New York Stock Exchange the best marketing bonanza they could ever hope for." (Reuters)

Investment banker sharks: Others believe the investment banks were to blame. The Facebook IPO was a bonanza of banking fees for firms like Morgan Stanley and Goldman Sachs. A civil lawsuit filed by investors alleges that underwriters "failed to properly disclose changes to analysts' forecasts while the deal was being pitched to investors." (MarketWatch)

Facebook itself didn't take IPO seriously enough: It wasn't just that founder Mark Zuckerberg insisted on wearing his trademark hoodie sweatshirt on the IPO roadshow. Facebook showed a lack of regard to the "importance of ethics and corporate governance."(Washington Post)

Jack Myers Media Business Report's original analysis of the Facebook IPO in his Media Business Report posited that the company should have been priced somewhere between $28 and $40. Pricing the IPO at the high end of that valuation was a tactical mistake. The stock is now an even better buy at its current price, which is where it belonged in the first place. The fact that the market has adjusted for the underwriters' exuberance and re-priced the stock at its original valuation shouldn't lead to all the nay-saying about its future value, which I believe will reach toward $70 within the next 12 to 18 months.

Analysts have mistakenly focused on Facebook's current dependence on online display advertising, which is expected to grow only 7.4% annually through 2015. But Facebook is primed to tap into new and some of the fastest growing sectors of the marketing business including social marketing, social commerce, digital couponing, email, and gaming. That means, by 2020, FB will be positioned to capture a significant share of a $150B-$200B digital and social advertising and communications marketplace in just the U.S. alone.

Facebook is wasting no time using its new stock as currency to make some strategic acquisitions. News surfaced on Thursday that the social network and Google (GOOG) have both emerged as bidders on a piece of popular music site, Vevo. Both brands are also jostling for massive ad deals with the company.

Vevo is a joint venture of Universal Music Group and Sony Music (as well as the Abu Dhabi Media Co.) and is valued around $1 billion off of revenues of $150 million. "The service is a useful chess piece for both tech giants, which consider music key to attracting online audiences and ad dollars," wrote the NY Post.

Google

Speaking of Google (GOOG), some interesting stuff is emerging with regard to the recently-announced Samsung Chromebox and re-jiggered Chromebook. Barclays' analyst Perry Gold believes the Google branded tablet is not far behind.

What increased usage of the Chrome browser means for the search giant is lower Traffic Acquisition Costs (TAC)? "While Google had a 73.5% share of global desktop searches in April, Chrome had only an 18.9% desktop browser share," wrote Gold in an investor note this week. But Chrome is on a tear of late, growing 300% in 2011 and ranking #1 or #2 in most countries. Google doesn't have to pay out on searches conducted on Chrome — owning part of the mobile device ecosystem is a key way for the search leader to lower its traffic costs. Barclays reiterated it's Overweight and $750 PT based on 17x 2012 pro forma EPS of $43.94.

Disney

Speaking at the Bernstein Research's Annual Strategic Decisions Conference, Disney (DIS) CEO Bob Iger explained why investors still don't fully appreciate the media firm. Referring to ESPN as his company's "golden goose," Iger sees little risk in pricing in sports programming or from the emergence of non-sports programming tiers. Bernstein's Todd Juenger also said DIS "prefers to be proactive and embrace new technologies, viewing them as opportunities, not threats."

TiVo

Tony Wible at Janney Capital Markets is maintaining his BUY rating on TIVO (TIVO), but is lowering his estimates and fair value to $13. He's concerned that increased expenses resulting from litigation and a sluggish environment for deal making could "cloud the path to profitability".

TIVO reported EPS of ($0.16), in line with consensus and added an impressive 206,000 news subscribers during the quarter. MSOs drove subscriber growth, with VMED's gains more than offsetting DTV attrition. "Longer term, we expect TIVO will benefit from rising IPTV competition that will lead more MSOs to quickly seek next generation interface technology in a cost effective manner," wrote the media analyst.

News Corp

According to Laura Martin, an analyst at Needham, there's an 80-90% statistical correlation between forward-year ROIC and share prices in the media space. Peeking under the covers at News Corp (NWSA), the analyst is lowering estimates for 4Q12, as operating income may drop 11%, as Filmed Entertainment faces stronger comps as well as higher P&A costs for summer release films. 4Q EPS goes to $0.32 from $0.36. She rates the shares a HOLD.

MDC Partners

Dan Salmon at BMO Capital Markets sat down with MDC Partners (MDCA) this week to chat about their business. Tone of business appears "incrementally positive" since the company reported on May 3.

If investors are worried that MDC needs to sacrifice short-term performance for long- term payoffs, Salmon now has an answer to allay their concerns. In November 2013, MDCA can call its 11% coupon notes at 105.5. A refi at these levels would yield $10M of interest expense savings. Consequently, he's cautioned investors that he doesn't believe there will be another investment phase over the next 18 months.

Salmon has a $19 price target and rates the stock OUTPERFORM.

LinkedIn

Doug Anmuth at JPMorgan examined another internet darling, LinkedIn (LNKD), this week. Taking a closer look at Talent Pipeline, a new service for LNKD's Recruiter solution, the analyst believes it increases retention rates and strengthens the business social network's value proposition with the recruiting community. He also sees early signs that LinkedIn is improving its monetization of mobile users (22% of total visits) after the firm launched its first iPad app in late April. The JPMorgan team is reiterating its Overweight and $135 PT.

Liberty Media

Liberty Media (LMCA) just unveiled a new plan to take control of Sirius XM Radio (SIRI). Recently, the Wall Street Report wrote of investors' disappointment that LMCA hadn't been more aggressive with its capital allocation, using it to buy in SIRI.

In this new plan, learned from Liberty's re-filing of its FCC application for control of Sirius' licenses, the company plans to nominate and vote on its own slate of board members and convert almost half of its preferred stock into common. This would give LMCA over 32% of common stock.

"We believe that Liberty's new plan to take control of Sirius is very likely to succeed," said Lazard Capital Markets analyst Ross Cohen. "Once it controls the board, we expect it to ramp up [stock buybacks], positive for both Sirius and Liberty Media stocks."

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