Facebook goes from $105 billion to $93 billion, within a couple of days of its IPO!
Who is to say what the right valuation is? Who has seen a hundred billion? With revenues of 1 billion, what justifies a 100x valuation in a company that provides its primary services for free, and depends on “eyeballs” (reminds me of the dotcom days) and “stickiness” to generate revenues from advertisers?
Where is the asset that is non-replicable? Where are the entry barriers? If these are solely due to the fact that people won’t move to other social networks, what benefit do you get by people sticking to your network? You allow them to post unlimited amounts of data and pictures, free, and run datacenters with a capacity of gadzillions of bytes to allow people to socialize. And then what? Provide space for advertisers to display their hoardings, provide access to “big data” to firms that will do “analytics” – how much revenue will this result in?
I can understand religious faith – visit the temple and the Lord will shower blessings on you! But what kind of faith is this, where people pour billions into an IPO where the revenue model is just that, a model – something that arrives at a Net Present Value of highly imaginary future cash flows? Pour your offerings into Mark Zuckerberg’s Hundi – if you don’t you are likely to suffer from a severe feeling of rejection, since everyone else is doing it, and there is comfort in belonging to the crowd. The Dutch Tulip case and several other examples of unsustainable price increases come to mind.
Ok, for that matter, why did people invest in Anil Ambani’s power projects, when all he had was a plan, to enrich himself? Why are telecom companies selling stakes to each other at high valuations (maybe that is not true any longer)? Why do people still invest in airline companies, which have no chance of making money, or in airline companies run by aging playboys, where the chances are even less?
Why does common sense desert us, and why do we always follow the herd?
Dinesh
(encl: nice article on Facebook, see below)
Facebook CEO: YOU Said Jump, I Said How High
May 22 2012
Let’s forget about the scam underwriters such as Morgan Stanley (NYSE:MS) perpetrated on the public by manipulating Facebook’s (NASDAQ:FB) IPO price and share count in the final 48 hours. Instead, let’s take a look at the deal from 10,000 feet: after 2 bubbles and crashes in a decade of stock market activity, Mark Zuckerberg et al acted perfectly rational in sucking dry the equity value pre-IPO. Don’t believe me? Just ask Ivan Pavlov.
Yes, Mark Zuckerberg’s decisions regarding the Facebook IPO were as predictable as Pavlov’s dog coming for dinner at the sound of the bell. Our culture of greed has conditioned a new generation of entrepreneurs to meticulously pull as much wealth as humanly possible from their companies before throwing the stock certificates to the sleazebag thieves on Wall Street. Reid Hoffman, Andrew Mason, and Mark Pincus did the same atLinkedIn (NYSE:LNKD), Groupon (NASDAQ:GRPN), and Zynga (NASDAQ:ZNGA).
At first blush this behavior sounds hardcore, but is it? Is it unethical to spend every waking hour and ounce of energy building a company (which in this case 900 million people use for free) only to try to capture the full value of equity? Do value creators such as Zuckerberg owe public investors a piece of the upside? Can any of us truly look in the mirror and say we would’ve called our underwriters and said, “Hey, wait a minute. I am making too much money here. Can you please bring the price of the IPO down so the general public can get rich too?”
Right. I don’t think so.
So, before we go bashing Zuckerberg as a greedy bastard, keep a few things in mind:
1) He is merely a product of the culture we find ourselves in circa 2012.
2) Younger people like Zuckerberg have seen nothing but cycles of Wall Street ripping off entrepreneurs and the general public in what amounts to a rigged casino.
3) Zuckerberg had the steel nerves to leave a huge portion of his risk on the table much longer than almost every other entrepreneur who hit world shaking milestones.
And now for the most important lesson from the Facebook IPO:
When a stock is over-valued, don’t buy it. Plain and simple. It’s a free country … and stupidity is a personal freedom.
As the proverb goes: don’t hate the player, hate the game. And if we’re genuinely sick of the bullsh*t game, then we need to stop playing instead of letting greed get the best of us. Or has Wall Street turned us into Pavlov’s dog too?
Now check out The Decline and Fall of Facebook’s Empire >>
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