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The Facebook Fiasco

Exactly whom are we supposed to feel sorry for?

Now that Facebook has done a faceplant the blame game has begun. Those that partake in this pursuit, U.S. regulatory authorities included, are dwelling in the land of futility. The real story is that had Facebook soared instead of slumped the same sleazy practices undertaken by Wall Street would have gone uncriticized, and the mob of greater fools would have been erroneously geniusized. Suffice to say, stock price should not be the determining factor when it comes to panting reality in the financial markets...and yet it is.


Even After Multiple Historic Market Busts, There Is Still One Born Every Minute

There is a budding theory that individual investors got suckered with FB - that they were somehow victimized by a Wall Street machine able to hypnotize them into handing over their hard earned dollars. Rather than lend much credence to this utter nonsense let me plainly say that if anyone wanted to buy Facebook and they didn't have a clue about the company's book value and/or some of the more basic valuation matrixes (i.e. forward P/E multiples, everything cash-flow related, etc) they are not 'investors'. To be sure, buying stocks is not something that should be undertaken by someone that doesn't have a basic understanding of corporate worth. Feeling sorry for someone that bought the insanely priced Facebook IPO is like going to the casino and patting the player that splits 10s on the back.

As for the other parties involved, Wall Street aggressively marketed FB shares and Facebook insiders apparently pushed for a higher launch price. Wow - what a surprise! The question that deserves to be asked here is whether Wall Street was creating stronger retail demand using fraudulent tactics or stronger demand was creating the required conditions for an insane IPO launch. As I remember it, the latter was more prevalent, and many analyst' warnings went unheard:

"....such warnings are falling on deaf ears as many people are drawn in by Facebook's brand name and the fact that one in seven people around the globe are on the social network. Facebook Inc on Tuesday increased the size of its IPO by nearly 25 percent and raised the target price range.

"I can't remember another IPO that got this much attention. Half the people talking about the Facebook IPO probably don't know what IPO stands for." Facebook IPO triggers retail investor craze

Finally, there are the lawsuits and upheaval regarding the withholding of revenue forecast changes that were only shared with select institutions before the IPO. On this point there may be some valid complaints given that underwriters could be in violation of laws restricting the flow of analyst views prior to the launch. Nevertheless, thinking about potential witnesses in the court of the hypothetical is a little amusing: 'I gambled on FB because I thought the company was trading at only 23-times 2012 sales. I would never have invested had I known that shares were really trading at 25-times sales...what do you think I am, an idiot?" The actual sales figures/downgrades are not really material (and the case for fraud is currently thin). Rather, the story ends with Wall Street firm(s) neither admitting nor denying guilt and the SEC or some other regulatory agency getting its greasy palms filled. Next...

Incidentally, I am all for change with regards to effectively policing Wall Street, but lets remember that analysts can call their top picks 'garbage' and Wall Street firms are allowed to make massive bets against the same products they tout to clients. Thus, it would highly naive to think that the stench of greed and sleaze on Wall Street and in corporate America is going to decrease simply because FB's IPO gutted retail speculators.


What Is Facebook Worth?

According to the prospectus, Facebook post-IPO will have $12.3 billion in shareholders' equity. Contrast this figure to the $104 billion IPO launch and even the $90 billion FB trades at today and you can quickly conclude that many years, perhaps even decades, will need to pass before the company's book value is even close to its current market cap.

The positive to be taken from the outrageous trailing P/B figures is that the company's net worth is backed by a high amount of cash (74% pre-IPO) and the recent growth rate is absolutely phenomenal (in each of the last 3-years FB has logged 120+% book value growth). A Coke-like P/B figure of say 5, even if growth does slow dramatically in the future, could still be attainable within a 3-5 year period. Is Facebook worth a long-term look at 5-times book if it continues to dominate the space and/or proves it can continue to generate strong FCF? Maybe so...

In short, the lesson from the Facebook IPO is that the stock price story is not as important as the characters in the play. If you like FB at say 5-times sales or 20-time FCF, don't feel sorry for the so called 'suckers'. Instead remember that panic selling, in most cases, is sponsored by the same crowd that chased FB's IPO. Facebook would require a very severe price collapse or many more years of supergrowth to enter an attractive realm, but stranger things have happened.

"...along with countless online forums and news articles about the IPO, they underscore the desire of ordinary people - many of whom have never invested in stocks before - to get in on the $15.2 billion share sale."

 

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