Will Investors See a Facebook 'Ratings Rally'?
Once again, Facebook Wall Street analysts are in the spotlight. On Wednesday, dozens of banks that were involved in the initial public offering will be allowed to publish a detailed analysis of the company publicly for the first time.
The coming deluge of research and ratings will mark the end to a tumultuous and controversial first 40 days for the social networking giant and its bankers, and, in keeping with longstanding IPO tradition, is expected to be an overwhelmingly positive day when it comes to sentiment surrounding the struggling giant.
The reason: It’s a not-so-well-kept secret on Wall Street that analysts at firms involved in an IPO generally take a bullish view of that stock. Regulators mandate that these banks cannot publish buy/sell/hold ratings until 40 days after the IPO prices, which means many of those opinions typically flood the market all at once.
Analyst like Michael Pachter, a Wall Street veteran who runs equity research for Wedbush (a firm that was not involved in Facebook’s offering), is expecting a “universal liking” for Facebook shares when the lockup expires — anticipating most banks will tell clients they see at least a 20 percent rally looming over the next 12 months.
Whether those views will end up being too rosy remains to be seen, but with such a large group of underwriters involved in the deal (33 in total), some analysts involved in the process worry a game of one-upmanship could distort the market.
“I think some people will swing for the fences to try to make a name for themselves by putting a big price target on,” said one underwriting analyst who is not yet allowed to speak publicly due to the lockup.
For that reason, experts are cautioning investors to remain extremely wary of trading a so-called ‘research rally’. “That’s already priced in,” warns Pachter — shares of Facebook have rallied roughly 24 percent since June 6.
After a disastrous first week of trading — Facebook shares plummeted thanks in part to a series of botched trades on the Nasdaq, which were widely seen as damaging investor confidence — investors were furious to learn that analysts at many of the banks involved in the deal had downgraded their views of the company before the deal priced.
Those downgrades followed public disclosures made by Facebook about challenges it was facing to monetize its mobile platform. And in keeping with long-standing IPO custom, the analysts informed only large institutional clients of their internally revised views, not smaller retail buyers.
Even though securities laws prevent analysts from publicly disclosing these views, the fallout has resulted in a number of shareholders lawsuits against both Facebook and its underwriters.
While Wednesday will offer key insights into how those analysts modeled Facebook’s future revenues, profits, growth curve, and price, it will likely leave many larger questions unanswered.
-By CNBC's Jesse Bergman and Kayla Tausche
@JBergmanCNBC & @KaylaTausche