Analysts Hit the Tepid Button on Facebook

By ALEXANDRA SCAGGS, TELIS DEMOS and DAVID BENOIT

Wall Street gave Facebook Inc. an unusually lukewarm reception, with research analysts offering up a higher number of "hold" ratings for the company's shares than "buys."

How did Facebook's stock, which was recently surging, fare as analysts reports came in? Steven Russolillo discusses on Markets Hub. Photo: Bloomberg.

On Wednesday, the door opened for research analysts at banks that worked on Facebook's initial public offering to publish their views on the social-network company's shares. Large Wall Street firms are barred for a 40-day period after an IPO from putting out analyst reports on stocks they underwrite. Smaller banks involved in an IPO aren't legally barred but typically agree to adhere to the delay.

'Quiet Period' Ends

See the ratings and price targets, bank by bank.

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Morgan Stanley: IPO Price on Target
The research analysts from the firm that drove the IPO put a $38 price target on the shares while initiating the stock at an overweight rating. Read More.

Facebook's Biggest Bear: BMO
BMO Capital's research analyst slapped an "underperform" rating and a $25 price target on the company. Read More.

Shares No Lock for a Pop
Analysts at Wall Street's leading firms are generally optimistic about the social network. But that doesn't mean Facebook's stock is primed for a pop. Read More.

J.P. Morgan and Goldman Gush
J.P. Morgan gave the stock a $45 price target and Goldman Sachs gave the social network a $42 target, well above Tuesday's close of $33.10. Read More.

Analysts at eight banks, including the three lead underwriters, Morgan Stanley, J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., rated the stock a "buy." Another nine dubbed the shares a "hold," and one, BMO Capital Markets, bestowed the equivalent of a rare "sell" rating on the stock.

The overall lukewarm review is unusual, according to data from capital markets research and advisory firm Ipreo Inc. An Ipreo study found that of about 700 U.S.-listed company IPOs from 2006 to 2011, 71% received a buy rating on average when the 40-day quiet period concluded, while 28% had a "hold" rating on average. With more neutral than buy ratings, plus the sell rating, Facebook's average rating is a hold.

A "hold" rating indicates that an analyst thinks a company is fairly valued at the current price and that investors avoid buying more of a stock but hang on to shares they already own.

Analysts' average price target Wednesday, $37.71, also was shy of the $38 price at which underwriting banks initially sold Facebook shares. It also was a hair lower than the consensus for analysts at firms not involved in the offering that previously had covered the company. A price target generally reflects what an analyst thinks a stock should be valued at over a 12- to 18-month period.

Facebook's shares closed down 87 cents, or 2.6%, to $32.23 in 4 p.m. Nasdaq Stock Market composite trading on Wednesday. Its shares were trading as low as $26 a few weeks ago but had risen to $33.10 by Tuesday afternoon.

Analyst reports from underwriting banks are often viewed by investors with a skeptical eye, because banks collect fees for taking a company public. Banks maintain their research is independent from the deals side of the business.

It isn't unprecedented among recent technology IPOs for analysts at large underwriters to be less than buoyant.

Groupon Inc., which was trading 17% higher than its IPO price the day before underwriting analysts initiated coverage, got an "equal-weight," or neutral, rating from its lead underwriter, Morgan Stanley .

Some market observers say "holds" are less surprising when the share price already has risen from its IPO price, arguably leaving less room to go higher. In Facebook's case, though, the stock is down from its IPO price.

The holds issued Wednesday show "how much uncertainty there is with Facebook's revenue-generation business model," said Reena Aggarwal, professor of finance at Georgetown University's McDonough School of Business, who also said tough market conditions may have been a contributing factor.

A spokeswoman for Facebook declined to comment.

J.P. Morgan and Goldman were the most bullish Wednesday, giving Facebook shares price targets of $45 over 18 months and $42 over the next year, respectively, saying Facebook was poised to lead an Internet revolution.

"We believe Facebook's virtual ownership of the social graph, strong competitive moat, and unwavering focus on the user experience position the company to significantly improve monetization over time and to become an enduring, blue-chip company built for the long term," J.P. Morgan's Doug Anmuth wrote.

Goldman said Facebook's users, currently at 901 million, will reach 1.54 billion by the end of 2014. That would be 70% growth. The firm called concerns over "Facebook fatigue" overstated.

Morgan Stanley, the lead underwriter on the deal, called Facebook the "Start of the Social Era" and said over the next 12 months its target price is $38, the exact price at which the lead bankers and company set for the shares last month. Morgan Stanley analysts led by Scott Devitt listed advertising pricing as among the key risks for the company.

Morgan Stanley and Facebook have weathered some criticism for pricing the company's shares at the top end of a raised price range and increasing the number of shares for sale just before the deal.

Morgan Stanley has stood by the decisions, while Facebook has declined to comment.

The lone bear Wednesday was BMO analyst Daniel Salmon. He said concerns about Facebook's advertising revenue were a main reason he rated the firm an "underperform," or sell, with a $25 price target.

Credit Suisse Group AG was the least bullish of the big banks on the deal, giving the shares a price target of $34 and a "neutral" rating.

Other banks offering a lukewarm view included Barclays PLC, Citigroup Inc. and Bank of America Corp.'s Merrill Lynch unit, with the banks expressing concern about Facebook's ability to generate advertising revenue as users gravitate toward mobile devices, which have commanded less revenue.

The underwriting analysts' average projection for Facebook's second-quarter earnings, 10 cents a share of adjusted earnings, were well below the prior consensus figures of 15 cents, according to Thomson Reuters data. The new estimates knocked the overall consensus down 19%, to 12 cents a share, a change that should give the company "an easier hurdle to clear" come earnings season, said Topeka Capital Markets, which wasn't an underwriter.

• J.P. Morgan and Goldman Gush
• Shares No Lock for a Pop
• Morgan Stanley Sees IPO Price on Target
• Facebook's Biggest Bear
• Facebook Analysts Click 'Like' – or Not
• Deal Journal: Analysts Facebook Ratings

Write to Alexandra Scaggs at alexandra.scaggs@dowjones.com and David Benoit at david.benoit@dowjones.com