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.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
drink or die's picture

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

Ahmeexnal's picture

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

Oh, the hilarity.

Muppet Pimp's picture

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

Up 6.5% in a little over an hour.

Xibalba's picture

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

Muppet Pimp's picture

Up 8%+ in less than two hours.

Xibalba's picture

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

Ahmeexnal's picture

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

The Big Ching-aso's picture



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

Travis Bickel's picture

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

geewhiz190's picture

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

ShorTed's picture

Goldman must have recommended shorting it.

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?



The Big Ching-aso's picture



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

veyron's picture

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

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.

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

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......

BandGap's picture

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

NotApplicable's picture

Or who strategically fails to deliver.

slackrabbit's picture

+1000 (inflation adjusted)  


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

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.

kralizec's picture

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

ArkansasAngie's picture

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

bdc63's picture

Party like it's 1999 ...

veyron's picture

When will Twitter IPO?

CommunityStandard's picture

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

Tijuana Donkey Show's picture

Never. DARPA and the CIA will fund them forever.

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

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
Dr. Engali's picture

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

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

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.

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. 

I am a Man I am Forty's picture

This was a pump and dump.

Bunga Bunga's picture

but but but facebook is up

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

Catullus's picture

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

bdc63's picture

$12 is my price as well.

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.

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.

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.

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.

Rainman's picture

+1 for proper use of the term relative safety

Bunga Bunga's picture

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

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.

Satan's picture

I once clicked on a Facebook ad by mistake.

bdc63's picture

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

junkyardjack's picture

Adblocker can solve that problem for you