Tuesday, May 22, 2012

Facebook's (un)reliable Data & A Duped Public.

In the video at the end of this post, it is highlighted that Facebook may have hinted to institutional investors and analysts that it's revenue wouldn't be what everyone thought. I really have to question why people who were paying such a crazy multiple of virtually every metric in existence for Facebook's stock during it's IPO are getting outraged by some revenue growth estimates being cut without them knowing. Don't get me wrong, lying is immoral. However, when stepping back and taking what I thought was a pretty objective view of the matter, it wasn't as if it was hard for me to stay away from the Facebook IPO... After all, that's what looking for a margin of safety keeps you away from: being overly reliant on growth models that may or may not hold up... Here is a snip from that write up:

"...lets say that everybody in the world magically had a computer with internet access- presently, 6.8405 billion people. Now, lets also assume that they all develop the same usage as our present average monthly Facebook user and that companies were willing to pay Facebook the exact same amount for advertising as they presently do per user... Facebook would then generate $25.4466 billion in ad revenue (don't get me wrong, is impressive, but, still not up to Google standards). If the company can keep the same margins of earnings related to the revenue (presently, ~21.2%: based on $3.154 billion in ads, which is slightly less than their total revenues, and $668 million in earnings for the A and B shares) then you are looking at a company that would earn just under $5.18 billion dollars a year. 
Now, in what I don't think is a stretch to call an "overly rosy scenario" if the company is at that point valued at $75 billion, the stock would have a P/E ratio of ~14.5. If the company is valued at $100 billion, then the P/E ratio would become ~19.3. At that point, there would be very few ways for Facebook to justify a P/E that was at that level, unless you thought that they could juice margins, people will start spending a whole lot more time on Facebook (even though on page 3 of the prospectus, the company boasts that users upload 250 million pictures to the site PER DAY), we find an alien life form that would want to use the site, advertisers pony up more money for advertising on the site, or a few other various reasons..."

If I had screwed up in my valuation of the company and been duped into buying the stock, then, maybe I would be angry too. But seriously, why would anyone be able to sleep very well at night owning a company where they paid prices that reflect one of the greatest growth rates that could possibly happen? Furthermore, with advertisers such as GM pulling away from Facebook ads, we aren't exactly sure as to what is going to happen with the company in the near term... Are the analyst revisions really a surprise!? As best I can tell, there is absolutely no discount in the price of this stock to justify virtually any amount of risk associated with the company.

Regardless, institutional investors and hedge funds probably shouldn't be privy to information that the public isn't. However, this is an instance where the public that "got deceived" should have been intelligent enough to think something to the effect of "Do I really want to pay what is approaching 30x the revenue that a company generated in 2011 for a piece of the Facebook pie?"

If they would have done that, then, it would have saved them a ~25% haircut in just a touch over 2 days. A few more 25% haircuts and I would likely be willing to go long the stock. Until then, I could throw a dart at the Wall St Journal and probably be happier with investing in whatever the dart hits, rather than Facebook. Can the stock preform well in the future? Sure. However, I wouldn't be thrilled to own it.

Disclosure/Disclaimer: I have no financial position or interest in or against, in any regard, to any of the entities mentioned. This is not advice of any kind and is solely my own opinion. Always do a ton of your own research before contemplating doing anything that I say, do, write, or so much as think about.

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