Tuesday, May 22, 2012

The Facebook Face-Plant: “Nobody Put a Gun to Their Heads”

 A friend called up today about the Facebook “Face-plant” hysteria: he wanted to know why everybody was looking for somebody to blame. 
 “They wanna blame the underwriters, they wanna blame the analysts, they wanna blame NASDAQ, they wanna blame the insiders.  But how about they look in the mirror?” he said.  “Nobody put a gun to their heads and told ‘em they had to buy it.”
 And he’s right.
 In fact, there was plenty about Facebook to make a sober investor take pause even before it became a badge of honor to tell the Wall Street Journal you were going to load up on the stock, as so many investors did.
 Check out, for example, the following sequence of quarterly revenue growth starting in March 2011 and ending in March 2012:

111.88%, 107.18%, 104.28%, 54.72%, 44.73%.

 Now ask yourself, “Is this a company I want to buy at any price?
 Well, that’s the annual growth rate in Facebook’s quarterly revenues, straight off our Bloomberg.  Not exactly “up and to the right” as they say on Wall Street.
 Here’s another set of numbers—also publicly available—that might have flashed an even bigger yellow warning sign for a prospective Facebook IPO flipper:

140.66%, 114.56%, 79.77%, 58.99%, 32.15%.

 That’s the growth in quarterly revenues from last March to this March, also straight off our Bloomberg, for Zynga.
 Zynga, as most Facebook fans know, is the equivalent of a hotdog vendor in Yankee Stadium: the only place it sells its stuff is on Facebook.  If you follow how the hot-dog vendor is doing on any given day, you have a pretty good idea how full Yankee Stadium is.
 So you would think anybody buying Facebook would have looked at not only Facebook’s revenue progression, but Zynga’s as well.
 And given those trends, you’d think anybody buying Facebook would have paid attention to the other warning signs, like GM pulling its ads off Facebook the week before the IPO; like the underwriters ramping up not only the deal price but the deal size; like CNBC devoting the entire day of the IPO to Facebook—that sort of thing.
 And of course you’d be wrong.  
 People wanted to buy Facebook, no matter what.
 And those people can blame the underwriters or the analysts or NASDAQ or the insiders all they want. 
 But as my friend said, “Nobody put a gun to their heads.”

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at Amazon.com

© 2012 NotMakingThisUp, LLC
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.


Mark B. Spiegel said...

And now many of those Facebook buyers are suing over their losses, because thanks to the cash doled out to Wall Street by Bush, Bernanke, Paulson, Geithner and Obama, EVERYONE feels entitled to invest in a "heads I win, tails I win" environment.

Of course, if Morgan Stanley really did secretly (except for top clients) cut its revenue estimates just before the IPO, well, it certainly deserves to join the financial losers on this deal. On the other hand, does anyone out there seriously think that those cuts would have deterred even a SINGLE buyer? Would any of those flippers and/or naive "holders" have said "Oh, I'll pay 25x run-rate revenue for this stock but there's no WAY I'll pay 26x"? Somehow, I doubt it.

Michael M said...

While I think many of the FB ”investors” would have found a way to loose their money in the markets somehow even without the FB IPO, I think you are confusing 2012 with an earlier year, perhaps one way back when morals mattered, where many believed that you shouldn’t do things you wouldn’t want to see on the cover of a newspaper. A time when people other than Buffett read newspapers and the brains of adults were outfitted with attention spans.

Good times it were, but those days are sadly gone. The only question that matters today is ”is it legal?” as in ”is it legal and what is the risk that the muppets sue us to the point where it hurts our profits significantly?”. And if Blodget is right, a big if, and FB violated Reg FD, then this could be the mother of all lawsuits.

Speaking of FB, it’s pretty ironic if a company that promotes openness at the expense of privacy, but is actually living off peoples selective disclosures ends up in a monster lawsuit due to illigal selective disclosures.

Anonymous said...

You're right that nobody put a gun to their head, but investors also weren't operating on a level playing field.

When the company allegedly tells its underwriters to lower the revenue forecast during the road show, that is pertinent information that all investors should have.

The retail investor who ended up getting 500 shares when the institutions backed away got screwed. They may have received 100 or 0 if that had not occurred.

And clearly, some (though admittedly not all) retail investors would have also backed away if they had known the underwriters lowered their forecasts.

AndyinSanDiego said...

Mark - I'm with you.

Michael calm down with the "Mother of all law suits". You think you're being just a smidge hysterical with that claim?

Anonymous - The playing field looked pretty level to me, see Mark's post.

Anonymous said...

Anon: "The retail investor who ended up getting 500 shares when the institutions backed away got screwed. They may have received 100 or 0 if that had not occurred."

Be careful what you ask for poor retail investor. If you ask for 500, expecting to be lucky to get 100, and you get your full allocation, it is on you. Own it.
25X sales? 20X sales? does it really matter?

Think for yourself.

Anonymous said...


It matters if the estimate is cut by the underwriter just before the IPO

Jeff Matthews said...

If the deal had worked, it wouldn't matter what the analyst did or didn't do. Nobody but nobody bought this deal based on "the number" in the first place. It's only because the deal didn't work that they're looking for others to blame.


Anonymous said...

So fraud is ok as long as your victims are foolish?

I would hope just the opposite would be the case. Fools are even more in need of protection from fraud then others.

Unknown said...

You seem to have good friends.

Sean said...

I knew this Facebook IPO flop was the fault of "Bush, Bernanke, Paulson, Geithner and Obama". Thanks for putting it so clearly, Spiegel!

Anonymous said...

So legitimate defenses to a lawsuit that you withheld material information from investors who you sold shares of your company to are:
1. You would've bought anyway
2. You would've lost the money anyway.

Think about this: no one put a gun to Facebook's (Z's) head. If you want to sell your shares to the public, you have to make full and complete disclosures.

Jeff Matthews said...

What, exactly, was the "material information" that was withheld?


Anonymous said...

When my broker at Morgan Stanley indicated he could get me 125 shares of the FB IPO, I was a little surprised, because he had never offered me shares in any other IPO before. Then, a couple of days before the IPO, my broker called me again and said he could get me an additonal 275 shares, for a total of 400 shares. It was then when I said to my broker, "Why do I get the feeling I am the patsy here?"