Facebook returned to the headlines on Friday, after it's stock price dropped below $20. At it's closing pricing of $19 on August 17, Facebook was trading at roughly half it's IPO offering price. Investors, analysts and journalists are all looking for the reason for the collapse and some at least seem to have found a ready target: the price drop, they argue, is the result of the "unlocking" of restrictions on insiders selling shares. The problem with this explanation is that it has never been a secret that insiders in Facebook would be able to sell shares starting August 16 and I would wager that no one would have even noticed the end of the lockup period, if the IPO had gone well and the stock were trading at $ 55/share. So, what is going on with Facebook? Why has its stock price plunged over the last few weeks? And is the stock cheap at $19?
- S1 Filing (February 2012): In my first post on Facebook this year, right after Facebook filed its financials (S1) with the SEC, I valued Facebook at $28/share (or $70 billion). I based this valuation on the company's immense potential (its vast user base and the information it had about these users), but was concerned about the absence of a clear business plan (to convert users to revenues), the overhang from insiders stockholdings/options (yes, you could see the lock up period ending in February) and the abysmal corporate governance.
- Playing the IPO pop game (February 2012): In response to a wave of articles that seemed to suggest that investing in the Facebook IPO (at the offering price) would be a sure road to profit, I tried to provide some history on the IPO game in my second post on Facebook, noting that while it was was true that investing in the average IPO does generate a pop for investors, this pop is not guaranteed and that the IPO game can be a loser's game.
- The day before the IPO (May 2012): On the day before the IPO, I posted on what I saw as the hubris of those involved in the IPO process - the investment bankers, the company (Facebook) itself and the institutional investors, who all seemed to think that they could lead the market by to wherever they wanted to go. I updated my valuation of Facebook to about $27 a share and contended that the stock would open with a relatively small pop (that the bankers would get the pricing right) but that the stock was overvalued for longer term investors.
- The post-IPO assessment (May 2012): The stock opened (late because of the NASDAQ technical problems) at about $42 and very quickly lost ground over the day to end the day at below the offering price. I posted my rationale for the momentum shift and argued that a great deal of the blame could be laid at the feet of the company and its bankers, who essentially took momentum for granted. I also ended the post by arguing that the switch in momentum could very well lead take the stock in the other direction, from over valued to under valued.
1. My value could be over stated: I understand that this is a risky investment and that my estimate of value could be hopelessly wrong. In fact, I followed up my intrinsic valuation with a simulation, where I looked at the distribution of intrinsic value, allowing revenue growth, margins and cost of capital to vary.
2. Management is not going to change: The corporate governance issue is the one that I have the most trouble overcoming. The structure of the voting rights in the company ensure that there is little that stockholders can do to influence how this company is run and that can be a potential problem if it locks itself into a self-destructive path. Calling for Mark Zuckerberg to step down or share power, as an article in the Los Angeles times did, are completely unrealistic. The Russians have a better shot at getting rid of Vlad Putin than Facebook stockholders have of displacing Zuckerberg. For some, this may be a deal breaker, and it came close to being one for me.
3. Vindication, even if I am right, will not come quickly: Markets know no fury to match that of momentum investors scorned, and these investors tend to turn with a vengeance on the companies that disappoint them. Put in stark terms, it is entirely possible that my valuation of Facebook could be right but that the stock price could continue to keep dropping as investors bail out. Eventually, the "intrinsic" truths will emerge, but it may be a long time coming.
My conclusion is that Facebook is not quite at the threshold of being a buy yet, but it is getting close. I have a limit buy order for the stock at a price of $18. I would be interested in seeing where you stand on the stock and you are welcome to enter your estimate of intrinsic value for the stock and your threshold for buying the stock in the shared Google spreadsheet.
A good buy at twice the price/earnings of google or Amazon? Probably not given that it cant figure out ways to legally monetize its "big data" and isnt coming out with any huge products. I foresee it going the way of myspace.
Remember when Yahoo! was the default stop for almost everyone on the internet in the US (circa 1998)? Well, at least they still have fantasy football.
Speaking of football, I draw a comparison of Facebook to Tim Tebow...no matter how bad the fundamentals are, there is a core group of true believers supporting it/him. Eventually, the fundamentals will win out.
I expect lower prices.
Facebook is a toy - that is becoming more annoying by the day.
Google is a utility - that is becoming more useful by the day.
I predict that we all look back one day and say man the writing was on the wall why were we so crazy in overvaluing facebook. Do they have data sure. But no one uses facebook for the reasons that drive adds. I don't want stuff from facebook. I want to see pics of friends weddings that I couldn't attend or get the invite to the random cinco de mayo party. Nothing more, nothing less. I'd wager the vast majority of the users are like me and thus don't translate into money for facebook.
Great point...and therein lies the problem. Nobody wants stuff from facebook...
Well, now that a smart person has posted that he has a limit buy order, that limit will never be hit- or if it is hit, the next stop will be $17.
I'm a value investor. Wake me up when Facebook's PE hits the teens. Then I'm willing to scratch my head and listen if the growth story is still good.
Until then, I'm pretty happy investing in Intel (3.5% dividend, 9x earnings) for my tech sector allocation.
The scary thing about growth stocks is that their valuations are more influenced by treasury rates than value stocks, since more of their value is from future cash flows. If you think the ten year T-bond is a sucker's bet, be careful getting into growth stocks. It might be better to stick to value.
You do realize Intels cap ex will continue to skyrocket right as they move to lower nodes, it requires brand new technology and new wafer sizes as well. EUV and 450 mm transition is expensive shit. But if your just holding for dividend and not expecting any capital gains, than its all good. I'd personally go with msft, 2.5% yield ain't bad, and one Ballmer removed from stock going up to $40s per share.
If you think CRM is a safe bet, or FB is a safe bet, or GOOG is a safe bet or AAPL is a safe bet, that makes Intel a safe bet. Because whoever the next big thing is in tech, they're going to need to buy cool-running Intel chips, regardless of how expensive it is for Intel to develop new technology.
I read somewhere that Facebook earns less ad revenue than Microsoft's Bing search engine. That's laughable.
Also, I don't think enough blame has been given to Sheryl Sandberg. I think the combination of Zuckerberg and Sandberg make for a totally incompetent and soft management team.
Very little accountability in their reporting metrics. I'm sure everyone is familiar with their BS active user metric. After GRPN's made-up metrics, you'd think that social media companies would need to learn to stop trying to trick the street, at most they can trick retail investors. Also their Ad spend metric to drive new business is less than inspiring.
Until facebook (or anyone) can figure out how to successfully monetize mobile as more users choose to access facebook through their phones it will mean only more stormy clouds ahead for FB. $5 here we come.
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