Tag Archives: Facebook

The “Hunger Games” Economy: The FOUR

Those four companies touch our lives whether we want them to or not.  How did those four firms amass so much power and what does that imply for our futures? 52% of Americans have Amazon Prime while 51% go to church.  You may know of these firms, but you and I probably vastly underestimate them, especially Amazon.

Whether you invest in those companies, you need to understand their effect on other industries.  How is value created and destroyed in the digital age?  While Amazon grows other retailers are barely treading water.  Amazon’s cost of capital is vastly lower than its competitors.

GM has 215,000 employees with a market cap per employee of $231,000 while Facebook has 17,048 employees with a market cap of $20.5 million pr employee. We are in a “Hunger Games” economy. Page 268: “We have a perception of these large companies that they must be creating a lot of jobs, but in fact they have a small number of high-paying jobs, and everybody else is fighting over the scraps.  America is on pace to be home to 3 million lords and 350 million serfs.  Again, it has never been easier to be a billionaire, but never been harder to be a millionaire.”


Socionomics and History; The Bubble in Social Media


The History of the Markets through the lens of socionomics

So does social mood CAUSE events or vice-versa? I found the video below interesting but socionomics seems too general for useful application. 

VIDEO: http://www.socionomics.net/hhe-part-1/#axzz2uM3BV7in


Note the date on the above Time cover–August 21, 1999. America was at its height of exuberance. The NASDAQ peaked in March of 2000 seven months later. 

Social Mood and the Stock Market and Presidential Elections

Sex and the Stock Markethttp://www.socionomics.net/1999/09/stocks-and-sex-a-socionomic-view-of-demographic-trends/#ixzz2uM4DB7aq

Talk about social mood? How about a bubble in social media? Do they ring a bell at the top? (Remember the AOL/Time Warner merger).

Facebook’s $19 billion takeover of WhatsApp (largely financed by issuing more of FB’s inflated stock, hence the price tag is in a way actually an illusion) has predictably produced a very wide range of reactions. Jeff Macke at Yahoo’s Daily Ticker was describing it as a ‘brilliant deal‘, heaping scorn on critics who in his opinion just don’t understand the value of a business employing metrics other than the money it actually makes (or stands to make in the future even under very generous assumptions, since a major attraction of the service is that it is actually free for one year, and thereafter costs a pittance). “They’ll eventually figure out how to make money from it”, according to Macke. Perhaps; Facebook’s shareholders were no doubt relieved to hear it.

On the other end of the spectrum of reactions,  Peter Schiff is criticizing it as just another outgrowth of the latest Fed-induced credit and asset bubble, noting that such pricey takeovers are typically only seen when oodles of money from thin air have flooded the system.

A great post: http://www.acting-man.com/?p=28860

Don’t forget to improve your investing by STUDYING the whole movie–ROUNDERS.  

Do Not Listen to “Experts” or Jim Cramer on Facebook (FB) IPO; Update on VALUE VAULT

Mad Money’s Jim Cramer came out strong on the Facebook IPO, claiming they were “too legit too quit” claiming he had better experience than anyone to call this. Sad day for the Mad Money host, looks like an epic fail.

See Cramer in action: http://www.youtube.com/watch?v=vKJSuBMr4u0

Who is to blame? http://www.youtube.com/watch?v=PSgKV6zJdHs

Cramer, again, takes no responsibility. Surprised?

Avoid “experts”

If you are a beginning investor struggling to find a way to invest then take the above as a lesson on what NOT to do. Make your own mistakes.  Jim Cramer is not an “expert” on Facebook. He did not value the company; he is only there to generate excitement.  Readers of this blog would at least know to figure out what expectations were built into the price of F. Go here: http://wp.me/p1PgpH-PM. High expectations for future growth can be lethal to the share price if those expectations decline. Spend your time reading annual reports in the companies that interest you not watching CNBC.

Analysts’ predictions:http://www.astrocyte-design.com/interests/analysts.html

Prudens Speculari

A further commentary from Prudens Speculari: Social Networking Junk. (Warning: this blogger despises MBAs).

I haven’t touched on the social networking sector in some time so I thought I would today. These gems are really something to behold. The sector is highlighted by Facebook ticker FB. What do you say about this? The chart says it all. The latest news is the sale of a huge whack of stock by insider Peter Thiel.

All the experts out the woodwork now that the horse has left the barn. I especially enjoyed the laughable rant by Jim “any investor who can get shares of Facebook should purchase as many as possible Mad Money 0516/12” Cramer the other day regarding the Thiel sale of stock. Funny how Jim gets lathered by an insider selling out, which by matter of fact is EXACTLY what an IPO is, yet the billion dollar purchase of a NO revenue, NO profit less than 2 yr old startup company Instagram (or Instacam as it should be called) is not concerning? Sadly for the minions who follow the pied piper of hype, the common denominator for Jim Cramer is if things are going up “who gives a shit”, but when things tank, look out cause he’s a scapegoat huntin’.

But it wasn’t just Jim Cramer. The street is full of his ilk. Do you remember these gems.

“I would invest in Facebook, I don’t care what the opening price is”
Apple co-founder Steve Wozniak as part of Facebook pre-IPO hype which should become case study blueprint material for aspiring Wall St. propagandists. So sure Steve, and the rest of us would eat, drink and party like drunken sailors were we worth a couple billion.

“Investors looking to short Facebook stock are getting in front of a freight train”

Needham and Co. senior analyst Laura Martin Wed May 23. 2012 with FB trading around $31-32/share. I didn’t even mention the $40 target she had on the stock. Thank heavens they didn’t let a junior shill, excuse me, I meant analyst near the stock.

Well, the social networking stocks continue to get crushed which is at it should be. Math is math and 2+2=4 no matter how many times a literal army of paid, Wall St. MBA’s tell you it equals 6.

Anyway back on April 23 of this year I had the following posts on twitter regarding some social networks.

“ZYNGA shareholders join GRPN 1’s hope’g 4 an Instagram-esque buyout miracle. Like GRPN, no fraud, simply “growing pains”
That comment about growing pains was from some Wall St. “Henry Blodget-esque’ analyst reassuring the ‘muppets’ that holding the stock that all was well.

“With Wall St. track record sell’g toxic paper I marvel @ the sheep lining up 4 shear’g. IPO shud B renamed ISO. Insiders Selling Out.”
To remind everyone the term ‘muppets’ is how Goldman Sachs fondly refers to its paying clients. I wonder how many Goldman clients out there think, “they can’t be referring to me, gotta be the ‘other clients”

“Don’t forget that other social networking ‘must own’ gem Angies

Update on Value Vault

I finally will have a block of time this weekend to push ahead with reorganizing the material. I know many of you have had troubles getting into the vault. The folders may be over the storage limit for the free accounts. I will speak to customer support this afternoon and find out the issues. Hang in there!


One More Time on Facebook Investor Psychology and Valuation

The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt.

– Cicero, 55 B.C.

As expected, investors who either did not know what they were doing or refuse to acknowledge that they paid too much, seek to absolve themselves of responsibility and blame others: http://www.nypost.com/p/news/business/facebook_claims_

Facebook CEO knew about overpriced IPO and dumped shares, new lawsuit claims

Mark Zuckerberg is losing even more friends.

Another group of disgruntled Facebook investors has reportedly sued the the social media guru, saying he made out like a bandit over the site’s botched IPO.

This latest class-action lawsuit claims Zuckerberg knew Facebook was horribly overpriced at $38 per share when trading began last month, TMZ reported today. He used that inside information to quickly unload shares, in a dirty billion-dollar move, the lawsuit claimed. FB closed at $27.72 a share and was down 27 percent since going public this past Friday.

Editor: Surprise! Insiders were selling on an IPO.  Of course, they believe the price is high enough to exchange shares for cash. Investors who do not shoulder their responsibility then lessons are lost and they can’t improve.

 Valuation of Facebook’s Growth

Tweedy Browne did a good job placing Facebook’s (FB) valuation in perspective. Go to i-7 of their annual report: TBFundsAnnualReportMarch2012 and an interview of Tweedy’s principals:VIIFundReprint_033112

As you can see in the above chart, you could buy roughly the same amount of earnings that Facebook produced in 2011 by simply buying Heineken Holdings for $13.5 billion, and you would then have $86.5 billion left over to go shopping for other companies in our Funds’ portfolios. For the remaining $86.5 billion, you could buy Emerson Electric, Devon Energy, G4S PLC, Torchmark, NGK Sparkplug, Daily Mail, and Teleperformance, and still have roughly $700 million in walking around money. When all is said and done, for Facebook’s IPO price, you could purchase the above group of leading companies in their respective fields at a price/earnings ratio of 10.4 times estimated earnings. As a group, these companies produced nearly ten times the earnings of Facebook in 2011, and paid dividends of over $2 billion. According to our calculations, Facebook would have to compound its current earnings at an annual rate of approximately 35% over the next ten years to catch up to the amount of earnings produced by the selected companies held in the Tweedy, Browne Funds, which are compounding their earnings at a more realistic 7% per year.

Now, it might very well turn out that Facebook performs as expected and compounds at even more attractive rates, producing superior returns when compared to the stocks selected above from the Tweedy, Browne Funds’ portfolios, but the stakes are high given the lofty IPO price. Very high expectations are built into stocks that trade at 100 times earnings. If it disappoints, the results for its investors could be disastrous.

Lest we forget, just six years ago, media and tech savvy News Corp., run by Rupert Murdoch, a rather shrewd investor, acquired MySpace, then the most popular social networking site in the US for $580 million, which valued the company at over 100 times earnings. Last summer, after a string of disappointments and corporate losses, News Corp. sold MySpace for $35 million to a company fronted by Justin Timberlake. At the time of the sale, MySpace had approximately 35 million users, which meant a purchase price of roughly $1 per user. Applying that metric to Facebook would give it a valuation of approximately $1 billion instead of the $100 billion, which is anticipated for the red hot IPO. News Corp. experienced a permanent loss of capital on its MySpace investment of 94%. From all indications, few expect Facebook to be such a flash in the pan. After all, it’s hard to question its efficacy at bringing people together, and in some instances it has even been a catalyst for political revolutions such as the Arab Spring. That said, expectations are extraordinary, and anything less than spectacular growth going forward could lead to disappointing stock market performance.

For us, Facebook serves as a convenient reminder that stock market prices can and do at times become significantly delinked from underlying value.

A Reader’s Question on Buying FaceBook (FB) Shares

“Where ignorance is bliss, ’tis folly to be wise.” Thomas Gray.

A Reader laments

“My broker bought FaceBook for me, and now I am sucking gas and losing money! What should I do and whom should I sue? Please advise.

My reply: Well, we all make mistakes like the time I asked a psychic for a stock tip or when I bought Cramer’s recommendations the day after the stock price rallied. But I was 8 years old.

Perhaps this Death Therapy would help: http://www.youtube.com/watch?v=w_bxkVFK3Wc

Or–on a more serious note–you might have a psychological issue with a gambling addiction: http://www.youtube.com/watch?v=gZfemmJ7gx0&feature=related and a shrink explains further: http://www.youtube.com/watch?v=o0K5o9xIceU

BEFORE you invest you must be able to answer two questions:

Is this a good business and a good price–a price with a  margin of safety–to pay for the business?  I don’t dismiss Facebook out of hand. I would read the comprehensive S-1:You can find Facebook’s S-1 here to understand Facebook and other media/advertising businesses. Certainly if I owned a newspaper or Google, I would wish to understand Facebook as a business. But the price of $105 billion compared to revenues and profits with all the surrounding publicity leaves me cold with several questions:

  1. What do I know about Facebook that no one else does? I don’t even use Facebook.
  2. How much speculative growth am I paying for? A lot.
  3. Who is on the other side from me on this investment? Mark Zuckerberg, an insider. No edge here.

Finally, looking at popular IPOs for ideas is usually a waste.  Look at busted IPOs a few years later when investors, who have overpaid, sell their shares. The business may be perfectly fine with low debt due to the high-priced equity raise, but the main crime was investment bankers overpricing their merchandise (no surprise).

Whom to blame?

You want to sue your broker? The person to blame is staring back at you in the mirror. Did the broker torture you to buy Facebook shares like in the Spanish Inquisition http://www.youtube.com/watch?v=CSe38dzJYkY

The investors’ Creed

Instead of saying, “This is my rifle……Say, This is my investment. I will always be rational in trying to solve the two investment questions: good price and good business. I will write down my reasons for buying and what I will do in case I miscalculate or misjudge the business and/or price.  http://www.youtube.com/watch?v=Hgd2F2QNfEE&feature=related

Facebook Articles

A value investor discusses Facebook both as a business and as an investment: http://www.gurufocus.com/news/177739/can-a-value-investor-buy-facebook-fb

Another analyst discusses what Facebook should trade for: http://www.marketwatch.com/story/facebooks-stock-should-trade-for-1380-2012-05-25?link=MW_story_popular

Well, then, what should be the price of Facebook’s stock?

Rather than endlessly rehashing the events that have taken place over the past week, it is this question that investors should be asking. Surprisingly, however, few are doing so.

And yet, courtesy of a just-released study, calculating a fair price for Facebook’s stock isn’t as difficult as it might otherwise seem.

The study is entitled “Post-IPO Employment and Revenue Growth for U.S. IPOs, June 1996–2010.” Its authors are Jay Ritter, a finance professor at the University of Florida, and two researchers at the University of California, Davis: Martin Kenney, a professor in the Department of Human and Community Development, and Donald Patton, a research associate in that same department. ( Click here to read a copy of their study. )

The researchers found that the revenue of the average company going public in the period analyzed in the study grew by 212% over the five years after its IPO (excluding spinoffs and buyouts). Assuming Facebook’s revenue grows just as fast, and given that the company’s latest-year revenue was $3.71 billion, its annual revenue in five years’ time will be $11.58 billion.

Since Facebook FB -3.39%   is most often compared to Google GOOG -2.01% , let’s assume that its price-to-sales ratio in five years will be just as high as Google’s is currently: 5.51-to-1. You could argue that this is an overly generous assumption, of course. But it nevertheless means Facebook’s market cap in five years will be just $63.8 billion — 30% less than where it stands today.

Assuming that the total number of its shares stays constant, that works out to a price per share of just $23.26 — in contrast to its recent closing price of $33.03.


Actually, however, the news is even worse: No one is going to invest in Facebook shares today if its price will be 30% lower in five years. So, in order to entice someone to invest in it today, Facebook needs to offer a handsome return. Assuming that its five-year return is equal to the stock market’s long-term average return of 11% annualized, Facebook shares currently would need to be trading at just $13.80.

Double ouch.

Don’t like that answer? Try focusing on earnings rather than sales, and you get only a marginally different result. Assuming its profit margin stays constant (instead of falling as it could very well do as it grows), assuming its P/E ratio in five years will be just as high as Google’s is today, and assuming that its stock will produce a five-year return of 11% annualized, Facebook’s stock today should be just $16.66.

How can Facebook investors wriggle out from underneath the awful picture these calculations paint? By assuming that its revenue and profitability will grow faster than the average IPO between 1996 and 2010 — and not just by a little bit, either, but a whole lot faster.

Of course, it’s always possible that Facebook will be able to pull that off.

More Articles


The Blame Game



Marketpsych on The Facebook IPO

A brand is no longer what we tell the consumer it is – it is what consumers tell each other it is.” –Scott Cook

IPOs such as Facebook indicate a much warmer market. For those who might enjoy reading more on a psychological perspective: http://blog.marketpsych.com/2012_02_01_archive.html

Musings about the latest happenings in the fields of investor psychology, behavioral finance, and neuro-finance. We’ll explain what the latest research means for you and your bottom-line.

Be skeptical……….