Friday, May 25, 2012

Facebook IPO

My parents were pretty consistent in one particular way: Whenever I would get hurt doing something I was told not to do, the most sympathetic statement I was likely to hear was, "Serves you right."

"Analysts" insisted that Facebook stock was worth 100 times current earnings. No reason was ever given why that should be so given that Google, Apple and the like, are running around 10-12x earnings (historically normal valuations). It just was so shut up and dump your life savings into Facebook stock. Why anyone in their right mind would do such a thing is beyond me, but hey, good luck with that. So now everyone is speed-dialing lawyers looking for someone, anyone, to blame for the inevitable outcome. It's Zuckerberg's fault. It's this or that Wall Street firm's fault. It's the stock exchange's fault. It's Al Gore's fault. (Why not? Makes as much sense as anything else.)

First of all, why would anyone fall for the same scam that's been being run with internet IPO's since the late 1990's? We've heard all this crap before. It's different now. All those old metrics for judging the worth of a company don't apply in the Internet Age. XYZ's growth potential is unlimited. Revenue will only go up. Blah, blah, blah. And every time, it all turns into a giant, steaming pile. Every. Single. Time. If you fell for it again, well, serves you right.

Secondly, even it you've been living under a rock for the last decade, you have to know that the big Wall Street firms all operate the same way; fleece the retail investor for the benefit of themselves and a select few of their clients. This has always been the case, although back in the 80's and 90's, stock funds were returning enough money that no one took much notice. Now that the stock market seems to be on a perpetual cruise-to-nowhere, everyone has realized that certain people seem to make money no matter what happens, and those certain people don't include us. If you are so willfully ignorant that you don't know this and you're investing in stocks, serves you right.

Finally, Facebook is claiming that 1 in every 7 people on the planet will be a user by August. Just how much growth can you realistically expect beyond that? A 100-times-earnings valuation would imply an expectation of 10x growth. Have aliens contacted us and expressed interest in becoming Facebook users? In any case, like all straight-line projection, this is probably complete BS. If you invest in any company based on not just what is likely BS, but ridiculously flimsy BS, then serves you right.

We've been down this road not once, not twice, but dozens of times over the last decade and a half, so pardon me if I seem unsympathetic to those who have been crushed by this latest fiasco. Let me be completely clear: I am unsympathetic.


Anonymous said...

Fb is worth $2 - $4. Maybe.
1 in 7 people in the world as users … how many of these have money to spend on the junk FB advertisers sell?
If the U$Fed and other central banks were not on a money printing binge, FB would be a short.

Ric said...

Exactly. I wonder about the shelf-life of the ad-supported web. I'd hate to go back to the metered access a la Comuserve and Prodigy, but one day soon, advertisers will wake up to the fact that a) ads are incredibly easy to avoid, and b) they're not worth the price. I just read today that Fox is suing Dish for making it too easy for Dish subscribers to skip ads.

And the entire stock market would look very different without the constant infusion of funny money from the Fed.