Facebook fought SEC to keep Mobile risks hidden before IPO
bloomberg.com
bloomberg.com
Ryan Cefalu, a 34-year-old data-systems manager and
father of two in Baton Rouge, Louisiana, said he
bought about $4,000, or about a month’s salary,
in Facebook stock and has lost about $2,050 on paper.
“The IPO went terribly,” he said. “I expected it to go
up for a couple days at least before it went it down.
That never happened. It never had a chance to.”
I'm a shareholder in FB, and have lost about 18% of the money I've put in, but I always expected it to go down for a while[1]. I actually never intended to invest until the first lockup period expired, but I got edgy when they finally started revealing their Adsense-esque ad strategy. As it works out, I'm actually at breakeven on the money invested after the first lockup expired. I figure that, within a couple years, my wild and crazy 'buy and hold' strategy is going to look pretty smart.
Then again, I could always turn out to be the bigger sucker ;-)
[1] Of course, my first tranche is down 40%, but I'm actually making it up on volume :P
I'm keeping them, hopefully in a year or two they are back to break even, maybe not. I don't care. I "play" the stock market for the fun of it. I certainly didn't expect it to tank nearly as much as it has done so far though.
I know hindsight is 20/20, but I'm genuinely curious: why did people think this was a good deal? (Aside from the fact that it might have popped a lot more on opening day due to general public interest.)
What we are seeing on the net nowadays is by and large the average people catching up to the brilliant things that every hacker, cracker and geek was happily doing in the 90s already, just on a much larger scale nowadays. All those friend websites, now called "social networks", are just one facet of this. So what happened with fb's ipo was the average people's dotcom bubble in a way, in my opinion. Ultra-hyped, practically everyone knows and/or uses it "so what could possibly go wrong???", right? I am pretty sure that's what was going on in most average joes' and janes' minds. They didn't question or analyze and just wanted to ride the sweet-sweet money wagon and not miss out on the action, they just trusted the name and hype alone. Much like the crash in the 20s where practically everyone was trusting "super secret ultra hot" stock recommendations from their barbers...
While I have no sympathy for him specifically, if a significant risk was deliberately kept from potential investors then I'd support investors more generally (I'm sure there were many who had less silly investment plans, who were genuinely investing in a company to see it and their investment grow long term) if they demanded an investigation into why this did end up staying hidden until after the IPO.
If fb fought to keep the information hidden, the situation can't as easily be filed under "it is the investor's problem that they didn't ask/research" as many stock market moans can be.
To me this article screams: "Waaah, I lost money on FB. Yes, they disclosed all of their risks ahead of time, but I would rather they would have predicted the future so I could go back and not invest".
If you think investing in hype is guaranteed money, you deserve what you get.
And also, can you define "expected to go down for a while". I think you rather meant that you expected this stock to lose a little bit of value [after you bought], but is it still in your stop-loss scenario (never heard any reasonable investor with 18% down stop loss).
[1] And please, lets stop comparing it to Amazon P/E. Why would you compare a company that makes tons of money for years based on the principle that humans need to buy products, with a temporary-trend where company makes money on annyoing ads that nobody wants or likes?
Lots of people (myself included) had been saying that Facebook was overvalued pre-IPO. I don't say this as any testament to any investment acumen I purport to possess (on the contrary, I largely suck at particularly short term share trading). What I do mean is that as an outsider with some cursory research and common sense, this was entirely predictable.
The only unknown with the IPO was how irrational the market would be and I'm glad to see it wasn't.
The people who say "look at the eyeballs they have; the sky is the limit" are the last people you should take investment advice from. Facebook had (and has) two primary sources of revenue: advertising and virtual goods. Valued against similar companies it was overvalued. And still is (IMHO).
I think this piece overstates that Facebook was attempting to hide things here. It's natural that any IPO will try to disclose as little as possible and try to be as positive as possible while stil being truthful and accurate.
Personally I may think of buying in if its gets down to $10-12.
Even so, Facebook is an extremely risky investment. Instagram is a cautionary tale here: from nothing to existential threat that you need to buy-to-shelve for $1 billion in two years... well, I guess it doesn't take much to threaten Facebook.
You could have shorted the stock or traded options.
There was a fair bit of uncertainty because the average Joe, his family and friends all used FB. Many investors feared that the stock would be driven by sentiment rather than rationality. If the stock went to 50, it would not have surprised me.
Like you I didn't support the high IPO valuations either but I still would love to own the stock with minimal downside risk. As would a lot of other people out there. FB has a lot of appeal.
At $10 the company will have a market cap of about $20 billion, which is pretty low for a company with a billion monthly active users. If you discount that, you are probably discounting the bigger picture.
At some point Apple had tremendous unrealized potential. The idea that it could get into phones and do really well wasn't hard to digest. On the contrary, it seemed like an obvious move.
FB has similar unrealized revenue potential. It could start charging $X per month to businesses with > Y fans. It could offer premium dashboards + analytics or similar features. There is no shame in premium, I am not sure why they only do advertising and commissions but my sense is that currently they are focused on growth and building a moat around their business.
I don't own the stock and I don't care if it goes up or down but your post seems be discounting the company's potential.
http://www.investopedia.com/ask/answers/05/062905.asp#axzz28...
It is also not possible to buy put options prior to the IPO as there are some guidelines that must be met prior to being able to buy puts. On Facebook specifically, they were not offered for almost 10 days after the IPO:
http://www.ise.com/assets/documents/AboutISE/PressRelease/Co...
If you were to actually discount the company's future potential, then an industry-standard P/E ratio would put it at $3-$4.
[Edit: I'm not a trader, but if I were, I'd be shorting down to about $18, and buying at $9.]
You could have shorted the stock or traded options.
Before you short any stock, it is wise to keep in mind the maxim "Markets can remain irrational a lot longer than you and I can remain solvent". This isn't really a problem on the long side (sans margin), but is a real problem on the short side.
I think you're making the mistake of backing into the valuation based on an arbitrary statistic they tell you is important. Who cares how many monthly active users they have if they can't make any money off of them. They could have six billion people using their service, but if they can't generate revenue from them I wouldn't pay $5 for the stock, regardless of how much potential they claim they have.
If all those users have the potential to generate massive revenue, fine... then prove it. Then maybe I'll buy the stock, but in the meantime here's no reason to rush in based on promises and "potential".
This has been done before. A lot of my friends used to hold their noses and gripe about AOL, but use it daily. AOL was founded in the 1980s, so it has reached the twenty-five-year age referred to in another comment in this thread. AOL is still in business, amazingly, although it is now far from being the dominant company in online interaction (that would be Facebook, these days). I've said it before, and I'll say it again: "Facebook will go the way of AOL, still being a factor in the industry years from now, but also serving as an example of a company that could never monetize up to the level of the hype surrounding it." I could be wrong, but that's my sense of where Facebook is in the market.
I don't think there's anything wrong with this; I'm not a shopping mall type consumer, but I enjoy wandering one now and again and can see the attraction. From an investment standpoint, it strikes me that the value of brick-and-mortar shopping malls is very much a function of the diversity and quality of the tenants they can attract, making Zynga the equivalent of the 1980s amusement arcade.
But its clear to me, Zuckerberg is more interested in long term growth of his company than he is any short term profitability goals. I think Facebook may well be a great stock to hold over decades - but not for months or weeks, as the current market seems to think in.
Lots of people think it is a great stock to hold on for minutes, just long enough to sell it to someone else after borrowing it.
Semi-relevant link I happened to come across recently: http://marginalrevolution.com/wp-content/uploads/2012/09/big...
Boeing comes to mind. BMW as well. General Electric maybe. Actually plenty of things in the hardware space.
From a summary I wrote of "Why Most Things Fail":
Of the 100 largest industrial companies in 1912, by 1995, 29 had gone bankrupt, 48 disappeared (mergers, acquisitions and so on), and 52 survived, but only 19 remained in the top 100. Once you discount the large number of small companies that fail in their first few years, the average lifespan for small companies is similar to that of large firms - and most of them eventually fail.
http://www.amazon.com/dp/B000XUBDQM/?tag=dedasys-20 - although I don't know if I'd recommend buying it. It's good, but never seemed to gel 100% for me.
However, of those 48 companies that disappeared. Aren't those essentially liquidity events resulting in a lot of money for the shareholders?
Some were probably good, others bad for the shareholders.
Don't know about TI's stock history, but they successfully negotiated many technology generations starting with germanium transistors.
If anything, for all fb employees including Zuck this was the big cash-out because they and their very close "partners in crime" were the only ones who really made any money from all this; for them it was pretty much money out of thin air and for the average investor, well it turned out to be the other way around.
From the comments regarding FB's IPO on HN in general, I am under the impression that the point of an IPO is to gain the company as much money as possible, and that in this regard, Facebook's IPO was a resounding success.
From the point of view of an investor, though, the IPO was a huge failure. Knowing, then, that any company approaching an IPO is trying to get as much money as possible from its initial investors, why would anyone want to be one? Is it solely because they are hoping that the company will be wrong about its own potential measure of success? Or was the Facebook IPO somehow different than an "average" one?
That's correct. The CFO who led this should get a huge bonus. As Mark Cuban said: if the CFO said he was able to raise $10B in an IPO and then decided not to in order to protect investors, he should be fired. (That's a rough paraphrase.)
>> why would anyone want to be one?
Because if you can get in pre-IPO you usually do quite well selling to the suckers at the open. But the suckers don't realize that the key point is "pre-". A few might remember the glorious IPOs of the 90s that seemed to rocket up every day, and hope this will happen to every Internet IPO.
The awkward part is that (a) and (b) tend to contradict each other -- why would you sell your share if the company is growing? (good answer: you need to sell a bit to buy a house. bad answer: you think the company has no upside potential)
If Facebook chose to go public 2 years ago at $20/share, it may well have seen the same hype-driven runup. Or maybe the pre-IPO pre-SEC private market auctions fed a 2-year bubble driving the stock up to ~35 based on wishful thinking and non-SEC-approved financial speculation, and the IPO was the cresting wave that took the stock close to 40 just as the wave broke and reality set in.
Publishing the SEC letters beforehand would be “a better way to get the information to the market than an amended filing,” said Peter Henning, a former SEC lawyer who teaches at Wayne State University in Detroit. “The SEC is a better soap box than the filings.”
Christ, that sounds like a PR disaster if not the stuff of more class action suits.
Current SEC policy is to release correspondence no earlier than 20 business days after the IPO. The SEC doesn’t post correspondence “real time,” said John Nester, a spokesman, because “people could misinterpret our questions to companies about their disclosure before companies have had opportunities to provide a complete picture.” By law, “a company is responsible for its own disclosures,” he said.
The rules are the same for everyone... But only scrutinized when a company does poorly.
Oracle has 15 P/E, so does Apple. Exxon has around 9 P/E.
For perspective; Amazon has 300 P/E, LinkedIn has 900ish.
With a bit of looking at investing information, you can get a rough sense of what's crazy to invest in for a individual investor looking at a < 1 year horizon. FB sure qualified IMO.
It's similar to the fact that if you tell someone a hundred people were killed in a bomb blast, they will brush it off. But if you describe the tragedy of a single victim, they will be crushed with feeling.