Best of the Week
Most Popular
1.Gold Price Target of USD 2,300 - GoldCore
2.Greece Banking System Collapse Monday as ECB Pulls the Plug, Capital Controls Ahead of GrExit - Nadeem_Walayat
3.Why British Muslims Are Leaving Elysium Paradise for Syrian Hell - Nadeem_Walayat
4.Greece BANKRUPT! Financial and Economic Collapse to Follow IMF Debt Default - Nadeem_Walayat
5.Extreme Gold/Silver Shorting - Zeal_LLC
6.European Empire Strikes Back Against Greek Debt Fantasy, Counting Down to GREXIT - Nadeem_Walayat
7.Gold And Silver – Three Choices: Sell, Hold, Hold and Add. A Trading Treatise - Michael_Noonan
8.Gold and Silver Price Headed for Breakdown - Jordan_Roy_Byrne
9.Greece Crisis OXI - Raul_I_Meijer
10.Flatline Investing and Dead End Debt Schemes - Doug_Wakefield
Last 5 days
The Great Greek Economic Depression - 4th July 15
Happy 4th of July Stock Market Analysis - 4th July 15
The Most Pressing Reason Yet You Want to Avoid Investing in Retail Stocks - 4th July 15
Fed’s Full Normalization and the Stock Market - 3rd July 15
The U.S. Dollar's 2014-2015 Rally: Wave 3 in Action - 3rd July 15
Stock Market Where are we? And where are we Going? - 3rd July 15
Xi’s Anti-Corruption Campaign Is Key to China’s Prospects - 3rd July 15
How the New Iranian Nuclear Deal Will Impact Crude Oil - 3rd July 15
China's Stock Market Rollercoaster Ride Continues - 3rd July 15
Gold Stocks Cheap to Buy but Not for Long - 3rd July 15
Capital Controls and a Bank Holiday in Greece… Here’s How You Can Profit - 3rd July 15
Greece's Varoufakis: I will Resign if there's a 'Yes' Vote - 2nd July 15
The Student Loan Bubble: Gambling with America’s Future - 2nd July 15
Inflation Is Lurking, but This Asset Can Protect You - 2nd July 15
Three Total Wealth Stock Investor Tactics You’ll Need Because Greece Isn’t Over - 2nd July 15
Why This $5.6 Trillion Investor Profit Boom Is Set To Take Off - 2nd July 15
Greek Debt Crisis: "Too late to prepare now" - Video - 2nd July 15
Guaranteed US Dollar Death Dynamics - 2nd July 15
The Greek Stress Test & The Reality Of Incremental Changes - 2nd July 15
Forget Drachmas Greece Syriza Government Could Instruct Central Bank to Print Euros! - 2nd July 15
Greece Debt Crisis Trigger for Stock Market Crash or Bull Rally? Video - 1st July 15
Gold Stocks Break Below 2008 Low - 1st July 15
SPX Stock Market Retracement May be Over - 1st July 15
Silver Tunnel Vision 'Experts' - 1st July 15
Gold And Silver - Monthly, Quarterly Ending Analysis - 1st July 15
Europe’s Controlled Demolition - 1st July 15
The End of Dow 18,000; Bailouts No Longer Extended  - 1st July 15
Athens Mayor: Greek Government Should Resign - 1st July 15
China Stocks - This Is What a Bubble Looks Like - 30th June 15
Stocks Plunge on Greece Euro-Zone Financial Armageddon Blackmail - 30th June 15
Greece Crisis Shows Importance of Gold as Europeans Buy Coins and Bars - 30th June 15
Stock Investors Express Route to Profits in the Healthcare Sector - 30th June 15
Beyond the Greek Impasse - 30th June 15
Gold GDXJ : Impulse Move Pending - 30th June 15
Fed Interest Rate Increase Could Be Best Thing to Happen to Gold - 30th June 15
Marc Faber - Greece is Basically Bankrupt - 30th June 15
Greece - Shoot the Dog and Sell the Farm - 29th June 15
Grexit?, BIS Warning, Chinese Market Crash & Systemic Risk Shake the Global Economy - 29th June 15
The New "Sharing Economy" May Not Be the Profit Bonanza Everyone's Expecting - 29th June 15
Gold and Silver Greece and Short Positions - 29th June 15
Volatility and Sleep-Walking Markets - 29th June 15
Greece BANKRUPT! Financial and Economic Collapse to Follow IMF Debt Default - 29th June 15
Stock Market More Decline Ahead? - 29th June 15
China Stock Market Crackup - The Final Trap Looms... - 29th June 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

China Stocks - Where are they going?

The Facebook Fiasco

Companies / Tech Stocks May 25, 2012 - 10:33 AM GMT

By: Brady_Willett

Companies

Best Financial Markets Analysis ArticleExactly 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."

BWillett@fallstreet.com

By Brady Willett
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History