Investors sue facebook

[mr friendly guy]

linky

ANGRY shareholders have filed at least two lawsuits against Facebook and investment bank Morgan Stanley over allegations that it withheld negative profit forecasts from some clients before the company went public.
Investor anger mounted overnight over the initial public offering of Facebook stock last week, which was fumbled by the banks that managed the deal and complicated by technical problems at the Nasdaq stock exchange.
The shareholder lawsuit, filed in federal court in Manhattan, is seeking class-action status.
The lawsuit alleges that changes made to Facebook's IPO filing documents, which warned investors that the social network lacked a strategy for monetising mobile, didn't accurately portray the impact on Facebook's revenue growth, the Wall Street Journal reported.
Investors said the members of a proposed class action have lost more than $US2.5 billion since the initial public offering last week.
Several other lawyers have filed suits over the IPO in other courts across the US, also seeking class-action status, the Journal reported.
One of the investors suing, Dennis Palkon, a professor at Florida Atlantic University, said that IPOs are tricky, but "this one had a lot of glamour, had a lot of interest. It has a lot of users. I thought it'd be a pretty good investment."
He bought 1800 shares of Facebook at $US38 through his ETrade account, meaning that after Tuesday, he was down more than $US12,000 on paper.
"I think there were problems all over the place," he said. "It was totally poor planning to raise the price as high as they did and then to add all those extra shares."
Morgan Stanley declined comment on the suit, but it said yesterday that it had complied with regulations in how it handled analyst reports before the IPO. Facebook called the lawsuit "without merit."
Morgan Stanley "reviewing trades"
Morgan Stanley is checking Facebook share orders placed by its smaller clients and will make price adjustments if they paid too much for the stock, MarketWatch reported.
The Senate Banking Committee, the Securities and Exchange Commission and other regulators also plan to look into the IPO.
Regulators will probably want to comb over Facebook's prospectus, the information it provided to potential investors, to make sure the company's disclosures were accurate and complete.
State securities laws and industry rules, mostly broader in scope than SEC rules, give state and industry regulators a wider berth to sanction investment firms that they accuse of failing to act in investors' best interest.
Judson Gee, a financial adviser in North Carolina, placed a call overnight to a client who had plowed $US50,000 into Facebook stock on Friday, the day of the IPO.
Mr Gee said he called to tell the client, a restaurateur, about reports that Morgan Stanley had told only select customers about an analyst's reduction of revenue estimates for Facebook just before the IPO.
"I could see his jaw dropping on the other side," Mr Gee said. "A lot of expletives came out." He said his client had asked: "How can they give that information to the big boys and not give it to the public?"
Too many shares on offer
In the final planning of the IPO, Facebook, working with Morgan Stanley, raised the total number of shares being offered for sale by 25 per cent, to 421 million. They expected extraordinary demand for the stock by investors.
That appears to have been a miscalculation. Facebook stock jumped from $US38 to as high as $US45 in the opening minutes, but quickly sank toward $UUS8 again. It dropped to about $US34 on Monday (Tuesday morning AEST) and $US31 yesterday.
Facebook's stock climbed 3.2 per cent in overnight trade to close at $US32 this morning, but is still trading nearly 16 per cent below its $US38 IPO price.
The first trading in Facebook stock, originally set for 11am Friday, was delayed half an hour by technical glitches at the Nasdaq Stock Market, and brokerages are still sorting through problems with orders.
Facebook "could leave Nasdaq"
The New York Stock Exchange has made a 'soft' pitch to lure Facebook from the Nasdaq, FOX Business reported.
A person familiar with the matter, speaking on condition of anonymity because the person was not authorised to speak publicly, told The Associated Press that Facebook was in talks with the New York Stock Exchange.
A spokesman for NYSE did not deny the report.
Lisa Lindsley, director of capital strategies for the American Federation of State, County and Municipal Employees, which has 1.6 million members and handles pension assets of $850 million, said the union was "very concerned about the lack of internal controls at all three firms," referring to Facebook, JPMorgan and Morgan Stanley.
Elizabeth Warren, architect of the Consumer Financial Protection Bureau and a Democratic candidate for Senate from Massachusetts, said Wall Street has lost an image that once said, "We are solid and we will be here forever."
"Banking should be boring," she said, "because boring creates confidence."
As if small investors needed a reason to feel queasier, the stock market is having its worst month of the year, mostly because of concerns about a debt crisis in Europe and whether Greece will exit the euro currency group.

[Sarevok]

Can a learned person explain why does a company like Facebook have negative profit ? Where are they spending so much money ?

Sorry for the ignorance, not a finance savvy person.

[Esquire]

At a guess, people (and Facebook itself) thought their stock price would rise like Google's or Apple's did. Perhaps it might have, if this were a few years earlier and not in the middle of general economic strangeness.

[Sea Skimmer]

Can a learned person explain why does a company like Facebook have negative profit ? Where are they spending so much money ?

Sorry for the ignorance, not a finance savvy person.

It was a negative forecast ; not that they would make no profit but that they would make less than expected in earlier forecasts and less than they had made earlier. Facebook spends lots of money on servers, lots of money on staff as they need moderators for 70 support languages plus the programming support. They employ around 3,500 people right now. Profits are shrinking because advertising revenue is slowly declining, which is the only source of income they have, while the operation is growing slower then it once did and costs steadily rise. In addition keep in mind that for a corporation which owns serious physical assets, depreciation becomes a factor. The declining value of items like servers is deducted from revenue to account for the fact that such items must be replaced and are no longer as valuable of assets so this can and will eat into the profit margin put on paper.

The basic issue with facebook is, they only do one thing, collect and sell advertising data based on peoples facebook data as well as space to host those targeted ads. Meanwhile the online advertising market is saturated and pays less and less per ad, because the market for advertising to be placed in keeps expanding as people add more and more websites and pages. Space for ads is rising faster than web users to view them and actually spend money on the products, so ergo what exists is less valuable by the day. Facebook is now only slowing gaining users. Google has similar issues, but Google has tried to push out into all kinds of other markets. basically if facebook doesn’t use its pile of cash to expand in new ways, it faces long term oblivion and the message from the markets has been people don’t believe the company has any actual plan on how it is going to do this.

Apple actually makes physical hardware, as well as software and keeps releasing new examples of both and getting people to pay for them, that makes them very valuable as long as they can keep doing it. Facebook is kind of like Apple if they just kept selling the Iphone 1. You can make money on it, but for how long?

[Magis]

Profits are shrinking because advertising revenue is slowly declining, which is the only source of income they have

Currently advertising accounts for 85% of Facebook's profit, the other 15% is for various other fees charged to various other entities.

if facebook doesn’t use its pile of cash to expand in new ways, it faces long term oblivion and the message from the markets has been people don’t believe the company has any actual plan on how it is going to do this.

That's not the message from the markets at all. There was enormous demand for the IPO. The stock price falling since then is due to things like insiders cashing out (the average Facebook employee was worth $2.9 million thanks to the IPO), short sales artificially increasing the supply of shares, and post-IPO investors getting out after not getting their anticipated bump on the first day of trading.

The very worst thing you could say about the message from the markets is that Facebook is "only" worth $70 billion, and not $100 billion. Which, on a per-dollar-profit basis, would still make it over 5 times as expensive as Google.

Facebook is kind of like Apple if they just kept selling the Iphone 1. You can make money on it, but for how long?

Facebook is expanding their product portfolio, too. Note the recent $1-billion acquisition of Instagram.

[Darth Tanner]

Facebook is expanding their product portfolio, too. Note the recent $1-billion acquisition of Instagram.

A picture sharing site that was competing with them and has no revenue except advertisement. How is that expansion of their portfolio, its if anything cannibalising their own income stream?

The very worst thing you could say about the message from the markets is that Facebook is "only" worth $70 billion, and not $100 billion. Which, on a per-dollar-profit basis, would still make it over 5 times as expensive as Google.

Wouldn't the implication from that be that their share price is going to steadily erode to a massive degree.

[Crossroads Inc.]

One can not live by adds alone..

I saw this coming a while back, and knew that the IPO was going to be the worst thing that ever happened to Facebook.
Up untill that point, they could get by with the "We have 900M users! That has to be worth lots!" And no one cared. But now, now that they are a "real" company and have share holders, well it is a house of cards that will soon fall.
The ad dollars they bring in is basically all they have, and that is in NO way worth 100, 70, or even 10 billion.

I do not think Facebook will collapse totally, but it is over hyped and over valued by an absurd amount.

[Guardsman Bass]

I wonder how Facebook will adapt to the rise in mobile devices, such as smartphones. Actually doing ads on a smartphone are rather tricky at this point, and that's not just Facebook's problem - Google is having the same issues with their mobile search engine application.

[Magis]

Facebook is expanding their product portfolio, too. Note the recent $1-billion acquisition of Instagram.

A picture sharing site that was competing with them and has no revenue except advertisement. How is that expansion of their portfolio, its if anything cannibalising their own income stream?

Instagram might not produce revenue now, but then again, neither did Facebook until a few years ago. Now, Facebook has revenue of over $4 billion/year. Whether Facebook will be able to squeeze more revenue out of Instagram remains to be seen.

The very worst thing you could say about the message from the markets is that Facebook is "only" worth $70 billion, and not $100 billion. Which, on a per-dollar-profit basis, would still make it over 5 times as expensive as Google.

Wouldn't the implication from that be that their share price is going to steadily erode to a massive degree.

The implication is that shareholders predict Facebook will grow its revenue much faster than Google. The price will only erode to a massive degree if Facebook isn't able to live up to the expectations of its shareholders.

[Blayne]

I wonder how Facebook will adapt to the rise in mobile devices, such as smartphones. Actually doing ads on a smartphone are rather tricky at this point, and that's not just Facebook's problem - Google is having the same issues with their mobile search engine application.

The camera glasses you can wear that has an real world overlay I would be shocked if it didn't easily fit in with google and facebook search engines/ads.

[cosmicalstorm]

Can a learned person explain why does a company like Facebook have negative profit ? Where are they spending so much money ?

Sorry for the ignorance, not a finance savvy person.

It was a negative forecast ; not that they would make no profit but that they would make less than expected in earlier forecasts and less than they had made earlier. Facebook spends lots of money on servers, lots of money on staff as they need moderators for 70 support languages plus the programming support. They employ around 3,500 people right now. Profits are shrinking because advertising revenue is slowly declining, which is the only source of income they have, while the operation is growing slower then it once did and costs steadily rise. In addition keep in mind that for a corporation which owns serious physical assets, depreciation becomes a factor. The declining value of items like servers is deducted from revenue to account for the fact that such items must be replaced and are no longer as valuable of assets so this can and will eat into the profit margin put on paper.

The basic issue with facebook is, they only do one thing, collect and sell advertising data based on peoples facebook data as well as space to host those targeted ads. Meanwhile the online advertising market is saturated and pays less and less per ad, because the market for advertising to be placed in keeps expanding as people add more and more websites and pages. Space for ads is rising faster than web users to view them and actually spend money on the products, so ergo what exists is less valuable by the day. Facebook is now only slowing gaining users. Google has similar issues, but Google has tried to push out into all kinds of other markets. basically if facebook doesn’t use its pile of cash to expand in new ways, it faces long term oblivion and the message from the markets has been people don’t believe the company has any actual plan on how it is going to do this.

Apple actually makes physical hardware, as well as software and keeps releasing new examples of both and getting people to pay for them, that makes them very valuable as long as they can keep doing it. Facebook is kind of like Apple if they just kept selling the Iphone 1. You can make money on it, but for how long?

That certainly cleared up a lot of confusion for me. Thanks as usual Skimmer!

[mr friendly guy]

http://www.news.com.au/business/compani ... 6366293194

Facebook gurus cash out before stock plunge

MARK Zuckerberg and leading Facebook investors cashed out millions of shares before the price dropped off a cliff, according to company filings.
It was also revealed a company executive issued a warning days before the initial public offering that Facebook's revenues were lower than expected, information that would have almost certainly reduced the opening price of the newly floated stock.
The new reports are already raising questions about whether top investors profited from the IPO at the expense of smaller buyers.

Shareholders filed a lawsuit against Facebook and the banks behind the company's stock, Morgan Stanley and Goldman Sachs, yesterday.
Both the US Securities and Exchange Commission and the Financial Industry Regulatory Authority are looking into the matter.
The US Senate Banking Committee has also launched an inquiry and the state of Massachusetts has subpoenaed Morgan Stanley. Facebook stock rose 3.3 per cent yesterday, to $32 a share. But a new analysis said the stock could fall as low as $9.59.

That would be a far cry from the $37.58 Zuckerberg fetched for the 30.2 million shares he unloaded on Friday.
The founder of the social networking website made $1.13 billion on the sale.
By Wednesday the price had dropped to $31 - meaning that Zuckerberg had saved himself $174 million.

The 28-year-old still holds a vast amount of Facebook stock but his decision to sell off so much will leave investors wondering about his confidence in the company.
The drop is based around the realisation Facebook might not be growing as quickly as initially thought.
And second-quarter growth will likely fall short of expectations as fewer new users join the social networking giant.
Shareholders filed a lawsuit yesterday, alleging Zuckerberg, Facebook and the banks that backed the IPO, Morgan Stanley and Goldman Sachs, knew this information.
On Wednesday it was revealed the banks' analysts downgraded their estimates of future earnings while they were rolling out the IPO.
Business Insider reported the banks revealed to privileged major investors the share price was likely to tank, but left smaller stock buyers in the dark.

The plot thickens.

[Crossroads Inc.]

Oh yeah THAT looks good.
When the founder and CEO CASHES OUT The instant stocks start trading? Not exactly out to build confidence is he...
For a long long time, people in the business community kept asking "How is Facebook going to make money, REAL money" and I don't know if Zuckerberg every really answered that himself.
One wonders if he is indeed cashing out, the man is a billionaire many times over so if Facebook tanks it won't exactly ruin him.

[weemadando]

Just once, it would be nice if a service went "no, we'll stay private and use ad revenue to cover costs rather than massively bloating and selling a shitty business model for billions to people who don't instead what they're buying."

Then again, if given that opportunity, I'd probably cash out too.

[aerius]

Gee, who coulda seen this coming? Completely unexpected!

If you read the S1 form which they filed with the SEC prior to the IPO, none of what happened should be a surprise.
Oh, by the way, the S1 also said their net income was falling and their ad revenue growth is starting to go into the shitter.
If you're dumb enough to buy into a company which forecasts falling income and revenue growth, you deserve to lose your money.

[wautd]

Gee, who coulda seen this coming? Completely unexpected!

Indeed, my small toe knew those facebook shares were a bubble waiting to explode (granted, much faster than expected). I'm going to play the smallest violin for those greedy idiots spend money on it.

[Magis]

The Facebook doom-and-gloomers seem to be everywhere. FB is down about 13.7% from the IPO. That is not the end of the world for a stock, and drops of that size are often unrelated to the fundamentals of the company (especially during the economic environment of the last 4 years.)

Over the last 31 days:

Dell: -23%
Apple: -9%
Eaton Corporation: -10%
Starbucks: -8%

Yes, Facebook seems to have been overpriced during the IPO, but guess what: stocks go up and down, and stocks fresh from an IPO tend to be even more volatile. A 14% drop, especially with that's going on in Europe, is nothing. This is not a bubble bursting. There may not even be a bubble at all. Investors aren't filing law suits because the stock went down, they're filing law suits because some people involved with the IPO may have broken the law.

If you read the S1 form which they filed with the SEC prior to the IPO, none of what happened should be a surprise. Oh, by the way, the S1 also said their net income was falling...

What are you talking about? The S1 form states that their net income has increased from $229 million in 2009, to $606 million in 2010, to $1 billion in 2011!

...and their ad revenue growth is starting to go into the shitter.

It didn't say anything of the kind. It said that the company expects its revenue growth rates to decline. That doesn't mean go into the shitter. Nobody expects a company to keep up the 262% growth Facebook had in 2010, or even the 65% growth is had in 2011. A "decline" could mean growth of only 55% this year. Oh no! The sky is falling!

... If you're dumb enough to buy into a company which forecasts falling income and revenue growth, you deserve to lose your money.

Uh, except they did not forecast falling income, and no company in the world keeps ups 65%+ net earnings growth forever.

[ArmorPierce]

Unlike google stock facebook is so well known and the ipo was so overhyped that a bubble was bound to happen and burst. The only thing that surprised me was just how quickly the bubbly popped.

[Thanas]

Is there a link to the form so we can check if aerius is right or blatantly lying?

[LapsedPacifist]

http://sec.gov/Archives/edgar/data/1326 ... 954ds1.htm

[Phantasee]

I've heard that Zuckerberg called 21 brokerages in advance of the IPO, and there are massive rumours of insider trading of FB shares. What a fiasco.

[Dave]

Is there a link to the form so we can check if aerius is right or blatantly lying?

http://sec.gov/Archives/edgar/data/1326 ... 954ds1.htm

Digging into the linked document, the following statement can be found on page 18:

We expect our rates of growth will decline in the future.

We believe that our rates of user and revenue growth will decline over time. For example, our annual revenue grew 154% from 2009 to 2010 and 88% from 2010 to 2011. Historically, our user growth has been a primary driver of growth in our revenue. Our user growth and revenue growth rates will inevitably slow as we achieve higher market penetration rates, as our revenue increases to higher levels, and as we experience increased competition. As our growth rates decline, investors’ perceptions of our business may be adversely affected and the market price of our Class A common stock could decline.

[Starglider]

Google Adwords are massively more effective than web advertising in general and Facebook in particular, because they're shown to users who are already actively looking for something vaguely related to your product. Even Google Display Network (Google-powered banner ads, to compare like-for-like) have a click-through rate almost ten times better than Facebook. IMHO because Google employ some of the best analytics programmers and hard-core compsci guys in the world, whereas Facebook seems to exclusively recruit incompetent option-chasing monkeys, although arguably the Facebook viewing context and active demographics is just inherently not spending-friendly.

As for the IPO, a textbook case of insiders literally laughing all the way to the bank and any dumb money who went for this deserves what they get. Stock should rally along with everything else when we finally get more QE/LTRO but it's still a dog.

[muse]

I do not know a thing about thing about the market beyond the basics, but I do work for a sizable company whose business is internet & social network advertising, meaning we do business with FB, Google, and many others. Not surprisingly the talk of the day for the past week has been the FB IPO and how it affects us, and if it makes sense or it's the biggest sucker's play since Pets.com. The short version - Starglider is right. We also think that FB's future revenue growth isn't going to be from ads and ad clicks, but from mining its database and selling the information to the highest bidders. One person summed it up as "if you can't figure out what the product is, the product IS YOU".

[Exonerate]

We also think that FB's future revenue growth isn't going to be from ads and ad clicks, but from mining its database and selling the information to the highest bidders. One person summed it up as "if you can't figure out what the product is, the product IS YOU".

I attended a seminar hosted by a VP at Oracle last month - he certainly thought this was the reason why Facebook brought Instagram. Not sure if I buy the claim that they'll do computer image recognition, but the metadata in all the photos could certainly be easily harvested.