Facebook shares fall 7% on Oculus deal
latimes.com
latimes.com
Seems extreme, although it was a bad day for tech stocks anyway, so the portion of the drop attributable to the acquisition is surely smaller.
Anyway, the market seems to be communicating that not only does it think FB got bad value, but that this deal is bayesian evidence that it is being badly managed.
EDIT: I still don't think 100% of the decline is attributable to the broader market move, because TWTR and certainly KING should be more volatile than FB. But, yeah, the story might not be as clear as I thought.
You buy some share in a company that you think will grow a lot; you discover that this company is not well managed, so it probably won't grow that much; you sell your stock, before the non-growth is realized.
That could be a rational rather than irrational explanation.
1.Z knows what he is doing and thinks the share price is overvalued.
2. Z has no idea what he doing. Who wants to own a company with incompetent management that can't be voted out by the shareholders.
Currently their price to sales ratio is closer to 150. Facebook paid a massive premium no matter how you cut it. Even if they grow sales ten fold over the next three years, they'll still have paid a premium. I don't think the Oculus purchase can be justified in any near-term financial regard, it's a very long term bet.
"Oculus has said it will start selling a consumer product in 2014, and till now has shipped an impressive 60,000 units to developers at $350 each"
http://www.forbes.com/sites/parmyolson/2014/03/25/facebooks-...
http://www.forbes.com/sites/benkepes/2014/03/25/google-slash...
It doesn't mean that the reaction is correct or that it won't be undone in the future. But there's a huge difference between "day to day fluctuations are unpredictable" and "day to day fluctuations are inexplicable."
The reality is the markets react to thousands of individual factors and often small changes lead into positive feedback loops. So, while the timing may be explained by some news breaking the magnitude of change is generally influenced by all those other factors.
</sarcasm>
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After a quick google it seems Facebook's beta is ~2. So a NASDAQ fall of <3.5% is an indication that something other than a general downturn impacted Facebook's price
Please correct me if my understanding is wrong
There are much better guides to stock volatility such as the put-call ratio, implied volatility of options or general market volatility as measured by VIX.
Facebook fell 7% in trading today. The NASDAQ fell 1.4%. So we have 3 (β=3) to 4 points (β=2) of excess losses. The author argues Facebook dragged down the NASDAQ today. Let's suffer the assumption. Using the S&P 500's 0.7% fall we see 5 to 6 points of excess losses. On a day the NASDAQ 100 Volatility Index jumped over 1 point intraday to 18 [1]. I don't smell blood yet.
Macquarie sees “no near-term financial model that will drive the $2 billion valuation.” Cross-posted below is my back-of-a-napkin work from a prior comment [2]. Development kit sales are not a perfect predictor of consumer sales. That said, they provide a snapshot of present enthusiasm for Oculus. They are also useful for forming ballpark estimates.
Oculus VR says it has sold 75 000 "development kits" [1]. It has been 1 year and 7 months since August 2012 [2], when Oculus VR began selling its development kits. Let's assume a 200% YoY 2013 growth rate - that means 56 000 kits were sold in 2013. Let's say these keep selling at the $350 the Developer Kit 2 goes for [3]. That's $20 million in 2013 revenues. Let's turn that into $2 million of profits - a 10% margin.
Let's value Oculus VR as if it were a growing perpetuity. If Facebook had a cost of capital of {10%, 20%, 30%}, Oculus VR free cash flow (FCF) would have to grow at least {10%, 20%, 30%} a year. Otherwise, its $2 billion price tag would not make sense.
Companies are not immortal. Let's value Oculus VR as a 20-year growing annuity. Setting Facebook's cost of capital at {10%, 20%, 30%}, Oculus VR's FCF would have to grow at least {45%, 58%, 71%} a year.
Not a bad deal.
https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...
Buying companies like this will undoubtedly come back for them and help them be a dominant force.
The problem I have with this deal is that a vision of a geek oriented, gaming-first hardware-first company that had the support and faith of the community now WILL be influenced by the vision of a company that many people do not trust.
It's not a lack of trust in Facebook for the sake of it, but from many years of repeatedly abusing the trust of their user base.
Automate this... <stock ticker> <fell|climbed> <x>% on <top company event of the day> - it's still be wrong but at least it wouldn't waste a writer's time.
I don't think many investors are familiar with Oculus VR. To them, facebook has just paid $2B for a company that hasn't released a product to consumers yet, and intends to make one of those headsets that were a big flop in the 1990s.
The other side of it (as you point out) is that institutional investors are generally not in it for long-term gains. If you manage a portfolio at an investment company, are hoping to get a nice bonus this year/quarter, hearing Mark Zuckerberg say he's bought a company that might take 5 - 10 years before it adds anything to Facebook is probably not very impressive.
What we have with Oculus Rift is that they were spooked by Sony, and decided to cash out while they still could.
VR will be a major major step for Sony if they get it right (which they are likely to do so) with PS4. They would absolutely own this space with their experience in 3d entertainment hardware.
There's rumors microsoft is working on VR. They also have an amazing 3d game creation platform for beginners called "project spark", very good at building developer communities a and would be happy to sell more PC's. Assuming they can create decent VR glasses, they seems to have the winning combination of hardware + content.
Even better - project spark content would be free, which is a powerful tool to achieve mass appeal.
Zuckerberg yesterday was talking about building new computing platforms. That doesn't necessarily increase the value of Facebook, but it takes away a lot of the caps that would otherwise exist on their future valuation. Now no one knows how much they might be worth in 5 - 10 years.
All of the Facebook acquisitions seem to be defensive. Even Oculus is a defensive maneuver against Google Glass, and the fact that Google is unquestionably committed to marketing Glass (see the latest pairings to attempt to market it to upscale people).
I suspect that Facebook has no idea what to do with Oculus, but it doesn't want it in the hands of Google or Microsoft.
Most likely this is not "on Oculus deal" (at least not solely) but for many reasons only Mr. Market knows.
Fluctuations happen in the market every day tech stocks are particular delicate because it can be harder to predict what is going to happen. If you look around, you'll notice Amazon dropped 3%, Twitter also dropped 7% (amongst a few others also down).
We don't know for sure that the acquisition of Oculus even caused the drop. Although, looking back on previous FB acquisitions you see a drop of investor confidence as witnessed with the Whatsapp acquisition.
When Facebook announced the $19 billion purchase of Whatsapp their share price tumbled 4.8%, once again this was a short-lived drop once the fanfare died down. Facebook know what they are doing. The fact Sony are moving into the VR space and apparently Valve are also going to be getting in on it signals this isn't a fad, this is a new-found technology arms race.
He who has the most money wins and at the moment, Facebook have a bit of money and a good network of investors behind them to propel Oculus to the top of the VR market and inevitably beat competitors on not only features but the all important price factor.
Edit: I've been down-voted. I respect that, but if you're going to down-vote my argument at least have the audacity to counteract it in the form of a reply.
I was planning on covering around $50, but given the pattern of the terrible and immature management decisions lately combined with souring macro environment, I'm planning on riding this one down to the 20s
But investors are clearly spooked by the latest pricey acquisition.