Submitted by Mark St.Cyr [10],
There has probably been no greater investing mantra placed upon an industry in recent memory than the now reflexive, as well as defensive response of “It’s different this time” when questioning anything Social. Trying to understand the business model along with its metrics, valuations and more is not only arduous, the response seems more akin to pulling teeth without anesthesia for those selling it, defending it, or both.
Those that have been with me for a while know I have little use for the whole “social media” thing. Although, while I don’t use any of it myself, that doesn’t mean I don’t see value and innovation in many of them. Again, I don’t use them, nor have accounts. However, I do have share buttons on my own site for those that do. So let me be clear:
It’s the valuations along with the metrics of their underlying business models and just how effective they are for those that are in business, along with the ROI for those businesses whether monetarily or in other ways for their time and money is what I take issue with. For as I’ve stated over and over again: “The only people making money in social media – are those selling you social media.”
When it comes to everything social, today, recent memory is about the last 5 to 6 years. Or: post financial crisis. Basically, everything you know, or think you know about valuations, their coming into IPO existence, as well the metrics they stood on (and still use) as to “prove” those valuations has all been within the most adulterated markets in history fueled by the advent of “free money” made possible by The Fed. via QE. This is a quantitative, as well as a qualitative fact. Period.
Never before has this (QE) been done in the history of the markets. So obscene has the valuation process become along with the metrics used to support it is why, “It’s different this time” was born. And precisely one might ask “why was that?” Well, just as a teenager who can no longer defend what they’re arguing and immediately cuts off further discussion with, “Because! Just because!” followed with “You just don’t get it!” When you’re wearing a $3K power-suit, “It’s different this time” sounds more grown up. Yet it serves the same purpose: It cuts off discussion leaving all the vagaries well intact. Nevertheless, there’s really no difference except for the wording.
The world of everything Social has been the undisputed benefactor of all this “free money.” After all, wasn’t the term “Unicorn” applied and accepted with all its connotations as being a mythical creature that lived and breathed in the land of make-believe? Social has spun out more entities with BILLION dollar valuations that either never made, or, currently making – a single cent in net profit. Or worse; having no sales period! One can see why the “Unicorn” title was so applicable here, as well as the need for a catch phrase to deflect any nay-sayers.
It is incontrovertible that if not for the “free money” provided by QE, many, if not most of what currently falls under the social media umbrella would not only never had come into existence (let alone with Billion dollar price tags) the perceived “hands off – unquestioning” attitude by Wall Street itself as many of the current top-tier entities spent Billions upon Billions of resource dollars making acquisitions – before they themselves have reached any true net profitability that could warrant such spending would be allowed. This in my opinion is an absolute wanton abandonment of business fundamentals and principles.
However, it seems there is a change of mood (or realization the jig is truly up) on Wall Street.
Back in September in my article “The Shot Heard Round The Valley World” [11] I opined…
“Let me go on the record here and point out what I believe will prove my point in the coming weeks and months.
Currently Zuck and crew have been lauded over with the prowess in its acquisition choices. You will know everything has changed when the calls to rescind Mark Zuckerberg’s authority in having carte blanche via not needing board approval for acquisitions going forward is demanded by Wall Street.”
What transpired during the most recent earnings call? At first what is shown to suggest as their still hitting on all cylinders they once again reiterated: they’re going to continue spending at just as impressive a rate. And the response this time? Suddenly far more concerned are those on Wall Street this time, than any time previous. The validation for it was near impossible to miss, as it was the singular point touted extensively, in unison, across all the financial media outlets. A prelude in my opinion for the coming demand I alluded to previously. An opinion I’ll contend was laughed at just months ago. Yet, suddenly – it’s no longer all that funny and is becoming a very serious probability.
In my opinion the only reason for the stock not dropping in sympathy (i.e., like a rock) resembling its other brethren of late was only for its current liquidity for the HFT’s too feast upon in the quarter end, window dressing made ever so prevalent in today’s near non-existent participation rated “market.” However these “stick-saves” are becoming increasingly short-lived. Just look to any other recent all time high flyer this quarter. Is it a: lifetime high based on fundamental principles? Or: A speculative stop run, HFT fueled blow off top in a month end earnings period? You be the judge is all I’ll say. Yet, there are clues everywhere if – one wants to truly see.
Remember: If the cohort of analysts or media venues that reached for every keyboard, camera, or microphone to justify why a company like Apple™ could suffer the fate of their stock gapping down some 4% or so after reporting a record-breaking 47.5 million iPhones®, an actual physical, quantifiable sale of a real product that generated Billions of actual net profits that were added to their existing coffers and the stock gets pummeled? What does that bode for the likes of many of today’s Wall Street darlings? Again, just for context: Apple delivered true net profits that produced surplus “cash” in the bank that the “Likes” of today can only dream of. Don’t let that point be lost. (Those coffers by the way are larger than the total market cap of many of today’s social darlings.)
Whether one likes Apple, their products, or story is irrelevant. What can’t be denied is they generate net profits that result in surplus “cash” in the bank. And they were subsequently hammered. How do you think the social media space will fare going forward from here since there’s no longer any QE, but legitimate valuation fears are manifesting within all stocks in general world-wide?
Maybe it’s just me, but I find it near laughable that these once social darlings just a few years since IPO-ing seem to be trying (or desperately seeking) ways as to find ways to expand, grow, justify, and more with anything but their raison d’être (i.e., their actual core business.) Along with every analyst as well as company figure-head contort their earlier views on why their valuations, metrics, and models are/were sound. For instance…
Facebook™ needs to make sure everyone is still on-board with its spending (because as implied – they’re gonna!) The reasons I guess are they’re realizing “Likes” ain’t gonna cut it. Whether investors will like that or not, and by how much, we’ll know soon enough over the coming weeks, or months. However, as I expressed earlier, this earnings call was “different this time” with the near knee-jerk as well as residual hand wringing about Zuck and crew’s continued adamant stand on spending.
And what should not be lost is how different it was as Wall Street awoke and became fully cognizant to the money they’ll be spending won’t be the “free money” afforded via QE. Rather, it will be today’s current share holders. In other words: Wall Street’s pockets.
And what is always front and center in Wall Street’s mind is: Facebook can spend all the money it wants – just as long as it isn’t Wall Street’s. For one must remember, Facebook doesn’t make a net profit via true unadulterated GAAP earnings to warrant (in my view) the expense of it spending those BILLIONS of dollars. That was in the days of “Trust us – we know what we’re doing.” Well trust me: Those days are over. Period.
Want another example? How about Twitter™? Let’s put them into perspective. I’ve been saying since their inception as well as IPO that this medium is truly revolutionary as to its application or niche. However, as a business model along with its valuation? I’ve railed about it for just as long. Below is an excerpt from an article I wrote in November of 2013 when Twitter was about to IPO.
“Never mind what their stock valuations are currently. A stock is not a company. The stock today lives in a world of its own divorced from reality. What I’m talking about here is business. What and how are these enterprises going to generate income as in revenue to support these valuations? Remember, if the markets as I have been pounding my fist over the last few years is based purely by Federal Reserve interactions. Adulterating them beyond the resemblance of the financial markets everyone once understood and could agree on. Then these Wall Street darlings can not only crash to Earth without warning, more than likely the bird that should chirp the loudest will be sprawled out in the bottom of the mine shaft. Not only can it happen in the blink of an eye, that blink is now considered an eternity in today’s stock market.”
People lined up in droves as to express how “I just didn’t get social” and a whole lot more. I was also impugned by nearly every social media “expert” as to why views from people like myself should not only be ignored – but laughed at. Many pointed at the near immediate surge in valuation as the stock ticked higher, and higher in the following months. Yet, that’s not the story today.
The reality is that today – if you invested $1 dollar in their stock – ever. You are just about $1 away from losing money if you bought into at any time – ever. That’s because Twitter’s stock is dangerously close to falling beneath the lowest price paid/sold since it IPO’d. Again – ever! And if you were one of those whom just a mere 18 months cavalierly shouting “hashtag this!” as the stock price went higher and higher. How’s all that working for you today is all I’ll ask.
Or maybe you’re one that couldn’t wait to sink your 401K teeth into LinkedIn™. Once again, after years of pushing higher, and higher, it seems the new story is same as the “old story.” i.e., They seemingly needed to spend money as to gain potential “integration opportunities” by buying something (e.g. $1.5 BILLION for Lynda™) rather than investing directly and maximizing everything of what LinkedIn currently is involved in. i.e., A glorified resume writing and/or job seeker data base.
In other words: They can’t make money via the old model as to warrant their current valuations. So, instead of doing what they do, and doing it better, enabling higher net profits, it seemed they had better buy something that can. Even if the price paid (again a reported $1.5 Billion) is money spent not from net profits – but from Wall Street’s pocket. Because for all intents and purposes, where else did it come from when using GAAP they actually lost $68 Million last quarter [12]?
All I can say, it appears someone made money. It just wasn’t LinkedIn, nor Wall Street, as they pounded its share price in one fell swoop some 10%. And so far, no one seems to be rushing in to buy at its now 25% plus or minus reduced “wonderful sale price” from where it stood only months ago.
How about Yelp™? Or should I say ouch? Because as of today that’s what many whom “invested” in this once heralded “social reviewing hot bed” are currently dealing with. And to spare many from yelping or howling more like dogs than what these stocks of late have morphed into. I won’t reiterate just how “clueless” I was scorned to be when I railed about other previous “darling” valuations and business metrics such as Groupon™.
This is the current, as well as ever-increasing pain of social reality coming to the entire social media space in my view. And I say “increasing” because I truly feel (and can argue the case) without QE – it’s over for this space as it currently stands today.
What portends for the space is how large some of these entities remain going forward, or, actually remain. That’s all up for debate. What’s not debatable or tolerable are the previous objections as to seek clarity to reasoned questioning about the business models, and/or viability going forward.
For the all too prevailing retort, laced with indignation, of the now well honed “well you don’t get it because – it’s different this time” will no longer suffice because – it’s different this time.
