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Guest Post: Facebook & the Bubble Mentality

Tyler Durden's picture




 

Submitted by John Aziz of Azizonomics

Facebook & the Bubble Mentality

So Facebook keeps falling, and is now floating around the $27 mark.  We’re a third of the way down to my IPO valuation of FB as worth roughly $2-4 a share (or 5-10 times earnings), although I wouldn’t be surprised for the market to stabilise at a higher price (at least until the next earnings figures come out and reveal — shock horror — that Facebook is terrible at making money).

The really stunning thing is that even after all these falls, FB is still trading at 86 times earnings. What the hell did Morgan Stanley think they were doing valuing an IPO without any viable profit model at over 100 times earnings? The answer is that this was an exit strategy. This IPO was about the people who got in early passing on a stick of dynamite to a greater fool which incidentally is precisely the same bubble mentality business model as bond investors who are currently buying negative-real-yielding treasuries at 1.6% hoping to pass them onto a greater fool at 0.5% (good luck with that).

This was achieved by convincing investors to ignore actual earnings and instead focus on projected future earnings. From Bloomberg:

Facebook, with a market capitalization of $79.1 billion, is trading at 29.5 times the company’s projected 2014 profit of $2.69 billion, data compiled by Bloomberg show.

Or much more simply, counting chickens before they hatch.

There’s an interesting comparison to the development of AAPL. Steve Jobs — who went on to do great things — was never fully in charge of AAPL until much later on. AAPL externally recruited CEOs with business experience, and Jobs was eventually thrust out of the company he founded, to continue his journey on his own. Failure is a really valuable lesson. Jobs was lucky to experience it and learn from it early before he ever got a chance to destroy AAPL.

FB isn’t really a bad business, and prospects would look much rosier if it were priced more realistically. It’s generating a profit — just a much smaller one than suggested by the IPO pricing. And management are being swept along by everyone else’s irrational euphoria. Zuckerberg can freely throw away a whole year’s earnings buying Instagram — an App whose functionality FB actually duplicated in-house almost certainly for a tiny fraction of the cash thrown at Instagram. And Zuckerberg — who controls a majority of the voting rights — isn’t going to get thrust out into the cold by shareholders. He can keep wildly throwing cash around so long as it keeps flowing into FB. The problem is, given the steep price falls, it looks like the river is running dry.

As I wrote before FB started falling:

The big money coming into Facebook just seems to be money from new investors — they raised eighteen times as much in their flotation yesterday as they did in a whole year of advertising revenue. For an established company with such huge market penetration, they’re veering dangerously close to Bernie Madoff’s business model.

That’s life. Bubbles get burst; the Madoff bubble, the securitisation bubble, the NASDAQ bubble, the housing bubble, the Facebook bubble, the treasury bubble. The trick is not getting swept up by the irrational euphoria. Better to miss a blow-out top than to end up holding a stick of dynamite.

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Thu, 05/31/2012 - 15:28 | 2480840 drink or die
drink or die's picture

I hear if you create a new Facebook account now you get a free Spiderman beach towel.

Thu, 05/31/2012 - 15:40 | 2480918 Ahmeexnal
Ahmeexnal's picture

Plunge Protection Team just intervened.
FB at 28.70 and soaring.

Oh, the hilarity.

Thu, 05/31/2012 - 15:44 | 2480922 Muppet Pimp
Muppet Pimp's picture

FB became a screaming buy at exactly 2pm.  Fascinating.

Up 6.5% in a little over an hour.

Thu, 05/31/2012 - 15:45 | 2480933 Xibalba
Xibalba's picture

I'm sure it had absolutley nothing to do with Morgan Stanley doing a Cnbs interview about it.  

Thu, 05/31/2012 - 15:58 | 2480972 Muppet Pimp
Muppet Pimp's picture

Up 8%+ in less than two hours.

Thu, 05/31/2012 - 16:09 | 2481011 Xibalba
Xibalba's picture

$FB to change ticker symbol to $FBI, possibly $NSA

Thu, 05/31/2012 - 16:13 | 2481022 Ahmeexnal
Ahmeexnal's picture

Actually, the listed name is Facebook Inc. CIA. ;)
I ain't making this up, take a look:

http://www.marketwatch.com/investing/stock/FB

Thu, 05/31/2012 - 18:25 | 2481040 The Big Ching-aso
The Big Ching-aso's picture

 

 

This could be the IPO of the decade.       If you're short.

Thu, 05/31/2012 - 17:00 | 2481161 Travis Bickel
Travis Bickel's picture

FB attempts a manufactured short squeeze at 2pm. Hang in there shorts.

Thu, 05/31/2012 - 15:53 | 2480963 geewhiz190
geewhiz190's picture

the sreaming you heard was from the crowd long at the IPO

Thu, 05/31/2012 - 16:15 | 2481029 ShorTed
ShorTed's picture

Goldman must have recommended shorting it.

Thu, 05/31/2012 - 16:24 | 2481051 BLOTTO
BLOTTO's picture

In the case of both Google and Facebook, three talented students in their 20's came out of obscurity to establish multi-billion dollar enterprises.

Do you think they had any help?

 

 

Thu, 05/31/2012 - 18:29 | 2481067 The Big Ching-aso
The Big Ching-aso's picture

 

 

Future social network IPOs should take a couple hundred pages from Facebook and not do one.

Thu, 05/31/2012 - 16:29 | 2481066 veyron
veyron's picture

I was convinced you made it up until I just checked.

Thu, 05/31/2012 - 16:29 | 2481068 eclectic syncretist
eclectic syncretist's picture

You didn't expect it could go straight down did you?  It's only short covering.

 

The volatility in the options is crazy.  Have a look at the june 30 puts.  Up 350% in two days, and giving most of it back today.

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=FBR16124...

If the short covering has enough legs I may look to buy some July 30-35 puts once it starts to sputter.

Thu, 05/31/2012 - 15:51 | 2480955 battle axe
battle axe's picture

The major  desks are going  in and buying  to try to save face, not going to work, they f*&ked up......

Thu, 05/31/2012 - 15:58 | 2480971 BandGap
BandGap's picture

It's not who buys first but who sells last......

Thu, 05/31/2012 - 16:14 | 2481027 NotApplicable
NotApplicable's picture

Or who strategically fails to deliver.

Thu, 05/31/2012 - 15:45 | 2480935 slackrabbit
slackrabbit's picture

+1000 (inflation adjusted)  

ROFLAO

Thu, 05/31/2012 - 16:30 | 2481069 Schiff hits the fan
Schiff hits the fan's picture

Some say the end is near.
Some say we'll just see more bailouts soon.
Spain certainly hopes we will.
Europe sure could use a vacation from all this
Bullshit, political circus sideshow of
Liars.

Here in this hopeless fucking country we call USA
The only way to fix our budget is to tell China we won't pay.
Monetize more debt, Every fucking day.
Convert to Gold now before your savings gets wiped away

Fret for your Facebook and
Fret for your Zynga and
Fret for your Linkedin and
Fret for your Netflix and
Fret for your Yelp and
Fret for your Twitter and
Fret for your Pandora and
Fret for your Groupon.

It's a Pooooonzi...
There's.... No.... Profits

Sell these worthless companies to the public right away
We've got to dump our shares before their value goes away
Could be any fucking time. Any fucking day.
Convert to Gold now before you lose your fucking face.

Some say the Euro will completely collapse
Followed by bank runs, riots, and pepper spray.
Followed by markets that cannot sit still.
Followed by millions of dumbfounded eurotrash

Some say the end is near.
Some say we'll see Armageddon soon.
I certainly hope we will cause
I sure could use a vacation from

Europe's stupid shit. Obama's stupid shit. Bernanke's stupid shit.

One great big unending political distraction,
I've a suggestion to keep you all occupied.

Convert to Gold.

Market's gonna crash soon.
Market's comin' round to put it back down where it ought to be

Convert to Gold

Fuck Warren Buffet and
Fuck all his clones.
Fuck all these inside trading
Piece of shit democrats

Convert to Gold.

Fuck your book value and
Fuck all your hedges.
Fuck your derivatives and
Fuck your short memory.

Convert to Gold.

Fuck all these CEO's,
With hidden agendas.
Fuck these continuous,
European Referendas.

Convert to Gold

Greece is breaking into mayhem
Japan's recovering from tsunami waves
I wanna see the DOW give way.
I wanna watch it all go down.
Just please flush our debt away.
I wanna see the Nikkei go right in and down
I wanna watch it go right in
Watch you flush it all away

Time to refinance my house again
Don't just call me pessimist.
Try and read between the lines.

I can't imagine why you wouldn't
Welcome a market crash, my friend.

I wanna see it come down
Bring it down.
Suck it down.
Flush it down.

Thu, 05/31/2012 - 16:40 | 2481099 NotApplicable
NotApplicable's picture

Excellent!

Fri, 06/01/2012 - 12:15 | 2484521 janus
janus's picture

A+

Thu, 05/31/2012 - 15:20 | 2480842 kralizec
kralizec's picture

I don't think attack subs could dive that hard without help.

Thu, 05/31/2012 - 15:33 | 2480885 ArkansasAngie
ArkansasAngie's picture

The buyer of bonds of last resort ... Bernanke.  His helicopter may end up being a sub plumbing new depths.

Thu, 05/31/2012 - 15:25 | 2480844 bdc63
bdc63's picture

Party like it's 1999 ...

Thu, 05/31/2012 - 15:23 | 2480847 veyron
veyron's picture

When will Twitter IPO?

Thu, 05/31/2012 - 15:52 | 2480958 CommunityStandard
CommunityStandard's picture

I'd have said when they start making money.  But that really doesn't matter.

Thu, 05/31/2012 - 16:24 | 2481052 Tijuana Donkey Show
Tijuana Donkey Show's picture

Never. DARPA and the CIA will fund them forever.

Thu, 05/31/2012 - 15:23 | 2480848 Dr. Engali
Dr. Engali's picture

Speaking of Farcebook.........a friend of mine just posted this:

passed huge convoy of military trucks and vehices moving up ___ i stopped counting at 90 as i had to exit - 1 caused a fatel accident near ____ ky - drivers were wear comboots cammys and black t-shirts all truck were not marked with a spec mil branch mark - trucks were mostly all carrying steeld 1/4 bed contaners , or tarp covered payloads. after exiting as i was moving thru backwoods KY spotted 15 heli's all black, apaches black hawks and 2 ch47's toting containers,

 

I thought it was interesting

Thu, 05/31/2012 - 15:30 | 2480872 drink or die
drink or die's picture

Perhaps you missed the top Google trends today then (with special notice to #5 and 8):

 

 Hot Searches   (USA)   1. seattle shooting   2. kathy lee gifford martin short   3. nba mock draft 2012   4. defense of marriage act   5. zombie attack      6. bath salts   7. rajon rondo   8. zombie apocalypse   9. doma 10. new orleans hornets
Thu, 05/31/2012 - 15:50 | 2480949 Dr. Engali
Dr. Engali's picture

The funny thing is they are # 5 and # 8 after kathy lee and mock draft.....Priorities I guess.

Thu, 05/31/2012 - 15:26 | 2480858 azzhatter
azzhatter's picture

Really, I think all the appeal of Fecebook goes away when it becomes an advertiser's cesspool. The problem is that's the only way it can make money. I'm not a genius but I long ago quit going to sites that inundate me with popup ads.

The potential earnings of this pig are greatly overstated and it's probably a decent $2-3 stock

Thu, 05/31/2012 - 16:17 | 2481033 NotApplicable
NotApplicable's picture

FB is not about making money (that's just a potential added bonus). It's the world's foremost networking intelligence tool. The CIA will spend whatever is necessary to keep it going.

Thu, 05/31/2012 - 16:27 | 2481060 Tijuana Donkey Show
Tijuana Donkey Show's picture

True, but I wonder how long until they launch their own search based on the "like" system. That might spice things up a bit. 

Thu, 05/31/2012 - 15:28 | 2480861 I am a Man I am...
I am a Man I am Forty's picture

This was a pump and dump.

Thu, 05/31/2012 - 15:28 | 2480864 Bunga Bunga
Bunga Bunga's picture

but but but facebook is up

Thu, 05/31/2012 - 15:30 | 2480877 I am a Man I am...
I am a Man I am Forty's picture

only because MS is buying it up because MS's Gorman coming on CNBC at 4pm

Thu, 05/31/2012 - 15:37 | 2480912 Hippocratic Oaf
Hippocratic Oaf's picture

That's CNBS to you!

Thu, 05/31/2012 - 15:29 | 2480866 Catullus
Catullus's picture

It's worth at least the BV of the cash on hand. $12/share.

Thu, 05/31/2012 - 15:38 | 2480916 bdc63
bdc63's picture

$12 is my price as well.

Thu, 05/31/2012 - 17:47 | 2481363 RopeADope
RopeADope's picture

Faceplant's tangible BV is under $5.50 a share. You forgot to deduct the $300 million payment for Instaloss and the $550 million payment to Microsoft for intangibles. You could also further dilute book value by the 200 million or so shares that are estimated to be awarded to officers and employees in the future. And you should probably discount cash in bank by the Suckerberg shareholder equity vaporizing factor.

Thu, 05/31/2012 - 15:31 | 2480881 Conman
Conman's picture

Eh what problem? At this rate it'll be back at ipo price by next weds. The worst news is the best news for stocks.

Obviously a deteriorating economy is the best signal to buy stocks.

Thu, 05/31/2012 - 15:32 | 2480883 DrDre
DrDre's picture

I only disagree on one thing. Treasuries are not in a bubble., unless by bubble you mean mad printing by the FED. The yields on treaasuries fully reflect the reality of this deflationary deleveraging cycle. Arguably it is a matter of definitions, after all this cycle is an "inverted bubble" that was caused by the credit bubble exploding.

Thu, 05/31/2012 - 15:38 | 2480911 skepticCarl
skepticCarl's picture

I'm with you, Dr. Dre.  People aren't piling into bonds because "bonds only go up", or " You can't beat them as an asset" , which are the mantras of real bubbles.  They are just convenient shelters of relative safety.  The 20 year experience of Japanese bonds demonstrates that as long as deleveraging is occuring, even in the face of monetary stimulus attempts, interest rates can remain low.

Thu, 05/31/2012 - 16:00 | 2480979 Rainman
Rainman's picture

+1 for proper use of the term relative safety

Thu, 05/31/2012 - 16:42 | 2481107 Bunga Bunga
Bunga Bunga's picture

Low yields are just a symptom of too much money not seeing real investment opportunities.

Thu, 05/31/2012 - 15:32 | 2480886 Joebloinvestor
Joebloinvestor's picture

I thought the major hype pump & dump was in motion when they did the fucking movie.

Everyone that had a vested interrest was pumping the FB pig and building the drama for the IPO.

I sensed a scam when someone told me I had a FB account, even though I never applied for one.

Thu, 05/31/2012 - 15:34 | 2480890 Satan
Satan's picture

I once clicked on a Facebook ad by mistake.

Thu, 05/31/2012 - 15:37 | 2480909 bdc63
bdc63's picture

so YOU'RE the one ... Suckerburg says thank you ...

Thu, 05/31/2012 - 16:05 | 2480997 junkyardjack
junkyardjack's picture

Adblocker can solve that problem for you

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