Wanna Buy an Internet IPO?
The market’s a long way off from the all-out frenzy of 2000 when hundreds of .com IPOs routinely doubled in their first day of trading. The celebrated offerings of 2011 and 2012, such as Zygna and Groupon have sunk below their initial offering prices.
So what of Facebook? After the IPO, it’s currently trading at $38.23 after one day of trading as a public company. My thoughts are as follows:
- Facebook is the hottest company in the world in terms of brand recognition, user popularity, user growth, internet domination, technological and social revolution…with roughly 10% of the world, and a much bigger % of the civilized world, using the platform each month…this all adds up to FB stock having a premium valuation.
- $100 billion valuation for an internet company with slowing growth, just $4 billion in sales and $1 billion in annual profits sounds absurd, especially given the internet darling Amazon.com, Inc. (AMZN) is also worth roughly $100 billion with just slightly slower growth and 15x the sales of FB. Mind you FB was valued at just $10 billion 3 years ago when they had roughly 1/4 the users and $50 billion in January 2011.
- FB’s stock tested the $38 mark and looked as if it wanted to drop under the IPO price a few times during its first day of trading, with prolonged pressure towards the close, which would suggest the price was being held up by the underwriters to avoid a certain amount of public humiliation – and they won’t always be around. Similar to stock promoters for pennyshares pumping up the stock price.
- The way to make $ on FB’s IPO didn’t really have anything to do with trading their stock for traders. The smart money was made by buying shares in similar plays like the incompetent adult social network FriendFinder Networks Inc (FFN) in the days leading up to FB’s IPO…buy in the low $1s and sell in the high 1s – 40% gain in a few days!
- There were a few other good risk/reward plays, shorting LinkedIn Corporation (LNKD) due to FB hype given it had spiked from $104 to $109 in the minutes leading up to FB’s IPO by way of example. Given LNKD finished the day $10/share off its $109 highs it’s already a 10% winner.
- FB currently earns a little over $1 per user per quarter…the bulls need more users and more revenue per user except revenue per user has been stagnant, to actually dropping a bit recently, and despite FB’s massive user growth, that % change is dropping too as there’s simply not many more people in the world that can signup…the bears makes a strong case that this is the fundamental problem with FB and why it is SO overvalued.
- There’s always the risk that Facebook won’t be a popular platform ever…the Myspace syndrome where they got bought for $500 million, was thought to be a great deal and worth billions, then got very unpopular very quickly. Don’t even get me started on Friendster and a host of other social networks like Bebo that were greatly hyped and now are basically worthless.
- FB has been adding features galore, the bulls say one or more of these features will really blowup Facebook’s revenues/profits…of course Google Inc (GOOG) has the same problem and none of their new projects have taken off…97% of their revenues still come from their one and only hit Adwords/Adsense that funds everything else…and unfortunately for FB, Google’s one-hit-wonder greatly dwarfs FB’s by nearly 10x (yet their valuation is only 2x hmmmm)
- FB’s user data is only going to get more valuable since they track EVERYTHING about us…Apple Inc. (AAPL) is the world’s most valuable company at roughly $500 billion so while FB is hyped, people at least realize it’s not the most valuable company in the world…by a longshot.
We have A TON of contradictory indicators here…the most important being the price action where FB wanted to crack below $38 on Friday which means it’ll likely drop big in the coming week/weeks when the promoters…uh I mean underwriters…stop propping it up.
That said, FB’s valuation isn’t too ridiculous given how widely popular they are and the probability that they will figure out ways to increase their profitability with boring but necessary things like payments and e-commerce.
I personally believed their IPO would have had more pop as the world’s masses would all put in market orders and bid the thing up into the $50s (with a view to it coming back down!), but I underestimated the ferociousness of the selling…insiders and early birds aren’t taking any chances – i.e. they know it’s time to take money off the table. For you to make any real money from FB, you needed to be in early with smaller amounts, or purchasing a huge volume of floated shares in the belief that the company value will go up over time.
Part of my analysis includes using Bloomberg’s IPO Index. If I’m right, the IPO Index suggests that it topped out on 27th March which means it is likely to worsen in the near future. The significance is that it doesn’t bode well for future IPOs given the current market climate, meaning that it will be difficult for FB – or any other IPO – to maintain or better its initial pricing over the longer term.
So FB is the largest Internet IPO in history and the third largest IPO ever. At the $38 IPO price, Facebook is on track to raise $16 billion — making it the largest tech IPO in history. It’s the third largest U.S. IPO ever, trailing only the $19.7 billion raised by Visa (V, Fortune 500) in March 2008 and the $18.1 billion raised by automaker GM in November 2010, according to rankings by Thomson Reuters.
It also happens to be about 6 times Google’s IPO proceeds in 2004. The biggest prior internet IPO, T-Online International raised $2.8 billion in April 2000. Perhaps more significantly, that was one month after the NASDAQ’s all-time peak. The Nasdaq’s recent counter trend rally high occurred on March 27th. So again there are commonalities between the timing which would suggest the boom in social media is about to be consumed by the bear market in social mood.
For opportunities to make money in a rising, falling and flat market, get hold of me.