Saturday, September 1, 2012

Facebook and California, aka Euro-Fornia

Facebook's stock is struggling, to say the least, having lost more than 50% of its value in a few short months.

But the Facebook story is far more than a simple saga about a company's declining share price. It's a story of California and the phony "extend and pretend" projection of government expenditures and revenues as well. We'll take the two stories in order.

1 - Facebook's Low Flying Stock

Facebook Shares Hit New Lows says this about the company's stock price debacle:

"Facebook shares fell $1.03, or 5.4%, to $18.06—a new low—Friday. That puts the shares at about 53% below their initial public offering price of $38.

"We remain constructive on FB's opportunity to drive an acceleration in revenue growth from new ad formats," Mr. Post (Bank of Amercia analyst) wrote Friday. "We see the success of new ad formats as paramount for the stock."

However, "recent selling activity on the August lockup suggests to us the risk of future selling pressure," he said. "And we wouldn't expect [the] stock to see buying momentum until December."...

The next Facebook lockup expiration comes Oct. 15, when another 249 million shares will be freed up. The biggest expiration will take place Nov. 14, when 1.32 billion shares—including shares held by Facebook Chief Executive Mark Zuckerberg—become available for trading. Dec. 14 will free up 149 million more, with the final 47 million shares available for trading freed up in May.

Meanwhile, BMO analyst Daniel Salmon sees more challenges for Facebook beyond the lockup expirations. It might be hard for the company to meet a 4% revenue-growth target in the third quarter, he said.

"We expect investor attention to return to fundamentals after the technical challenges presented by lockup expirations over the next six months have been absorbed by the stock," said Mr. Salmon, who cut his target to $15—18% below Friday's trading level—and reduced his third-quarter revenue target to flat. "Valuation is underpinned by revenue growth, and we believe flat 3Q sequential growth would be met with a step down."

Mr. Salmon rates Facebook at "underperform," while Mr. Post maintains a "neutral" rating on the shares.

BMO's $15 target is by far the lowest of the 22 analysts with estimates, according to FactSet data. The average of all targets is a price of $33.27, more than 80% above Friday's trading level. The next-lowest Facebook target is $20.30 from Axia Financial Research. Oppenheimer's Jason Helfstein and Piper Jaffray's Gene Munster have the highest targets at $41.

A spokeswoman for Facebook declined to comment."

2 - California's "Unreal" Budget and Tax Receipts

So what's this mean financially for the great state of Euro-Fornia, you ask?  Well, it seems Governor Brown has been betting on the come and forecasting lots of 2012 tax revenues from Facebook's shareholders selling at much higher prices that its current price.

The Facebook Deficit is subtitled 'So much for Jerry Brown's social-media revenue windfall.' It tells the story of California's tax receipts shortfall due to the dramatic price decline in Facebook's shares:

"Who's the biggest loser in the Facebook stock meltdown? Next to founder Mark Zuckerberg and IPO underwriter Morgan Stanley, it's arguably California.

Governor Jerry Brown's wing-and-a-prayer budget in January predicted the Facebook IPO would help to close the Golden State's $9 billion deficit with a $2.5 billion tax windfall over five years. Mr. Zuckerberg alone was counted on to pay nearly $1 billion in capital-gains taxes. The hope in Sacramento was that the Facebook IPO would repeat the "Google surpluses" of the last decade after the search-engine giant went public and the state treasury landed a $7 billion jackpot.

Sorry, Jerry. Early this month the state's Legislative Analyst's Office reported that because of the near 50% decline in Facebook stock from its $38 a share offering price, "hundreds of millions of dollars of income tax revenue assumed in the state budget plan are at risk." It'll be even worse if other young tech companies don't go public or do so at lower valuations. The Facebook falloff comes after state tax collections in the first half of 2012 had already fallen $3.5 billion below earlier estimates.

For at least a decade California has conjured up accounting tricks—raiding trust funds, borrowing against future income from the lottery and tobacco settlements—to cover up chronic overspending. This hocus-pocus only delays genuine solutions, such as serious pension reform, canceling the $68 billion high-speed rail boondoggle, or collecting billions in royalties from drilling for the state's oil and gas reserves.

Instead, the Governor shrugs off the Facebook selloff and crosses his fingers that the stock may rise again, or voters will agree in November to let him raise taxes. Anything except the hard task of reforming government."

Summing Up

The real story, and an ugly one it is, is the extend and pretend phony stance of California's government toward budgeting and state tax revenues. Governor Brown and his legislative cronies keep projecting miracles, and taxpayers later get the ugly reality shoved in their faces.

Governments have long played the predict the unlikely and hope it comes true when planning budget revenues and expenditures for future years. Then they proceed to spend more than projected and take in fewer taxes than predicted.

As a result, all too often state budgets compared to reality reveal an ongoing double whammy of negativity, if you will. Taxpayers, as always, then get stuck with the bills.

As the financial budgetary problems in the U.S. governments (national, state and local) continue to deepen, individual states like California and Illinois are running out of places to hide. They're runnning out of time to stay hidden as well.

The days of extend and pretend are drawing to a close, and in the end that will prove to a very good thing for taxpayers and citizens alike. Painful but necessary and therefore good.

The fiscal sanity show will soon be coming to our nation's capital as well.

And we'll all be the better for acknowledging and acting on this inevitable reality recognition sooner rather than later. Time's a wasting.

Keeping our eyes closed won't make our problems disappear.

Thanks. Bob.

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