Photo: JD Lasica
The Wall Street Journal has a big scare-story about analysts at big banks and their Facebook stock ratings.Despite the fact that Facebook’s stock tanked once it hit the public markets, Wall Street analysts have largely issued “buy” recommendations for the stock.
This is a problem, says the Journal because:
What some see as the relentless “buy, buy, buy” optimism has deepened scepticism about the Wall Street stock-pitching machine. Critics say Facebook is a telling example of the divided loyalties at many firms, which woo lucrative investment-banking clients and then prod brokerage customers to buy the same stocks even if they look bruised.
This is a very familiar, and very old story. But this time, it doesn’t really ring true.
You see, when the banks that underwrote Facebook’s IPO started putting out their recommendations on the stock, they weren’t exactly glowing.
Morgan Stanley, for instance, had a price target of $38 on the stock in its first research report. The IPO price was $38. That means Morgan Stanley’s analysts said any big institutional investor that bought the stock at $38 wasn’t going to see a gain on the investment in the next twelve months.
We’re not exactly certain how this could be construed as some shady deal by Morgan Stanley to sucker people into buying Facebook stock.
Other analysts with buy recommendations on Facebook also have price targets right around $38, which is an insult to the people that paid the IPO price.
If there really was some grand conspiracy on the part of Facebook’s bankers to push off Facebook stock, the price targets would be much higher.
The Journal also seems to be unhappy that even as banks lowered their price targets by a few dollars they maintained their buy ratings.
This is just how it goes with sell-side analysts. Look at Apple. The price targets went way up, and have come way down, but overall, it’s still rated a “buy.” Investors can’t go on just buy or sell ratings. They need to read the reports and make up their minds.
Also, maybe, just maybe, analysts actually think Facebook is going to go back to $40 a share. After all, it’s a company with 1 billion users and a big opportunity to monetise its mobile application, something it hasn’t yet done. It also has a chance to develop a new ad network.
Big smart investors bought the stock at $38 a share for the IPO, which suggests they thought it was going to pop higher. This suggests that analysts who have twelve month price targets of $40 or more aren’t all that crazy or engaged in some sort of side dealing. They just think the stock is currently undervalued.