One of the problems with writing for the internet is that you feel that you must give an immediate opinion on every piece of news. When something happens you have to catch the story while it’s hot and trending. In some instances, this can easily be done, but in others, a little bit of “wait and see” is called for. This week saw two pieces of news that garnered more than their fair share of instant reaction, but I don’t believe the significance or otherwise of either one can yet be known.
First, on Tuesday, Facebook (FB) announced a deal to buy virtual reality headset maker Oculus VR for $2 billion in stock and cash. There was no shortage of immediate reaction. Some saw this as evidence that FB had lost its corporate mind following the $19 billion acquisition of WhatsApp just a few weeks ago. Others believed that it was a justified investment in an inevitable, if somewhat scary, vision of the future. The market seemed more inclined to the former, as the stock traded substantially lower on Wednesday.
To some extent, both views may be true. Just as with the WhatsApp deal, a solid case can be made that Facebook paid a premium to acquire an instant foothold in a market that may or may not turn out to be big. The company was criticized a few years ago for being slow to embrace the mobile revolution. They have certainly made up for it since, but now that they are generating cash and the stock is flying, they seem determined not to make the same mistake again. Taking a chance on acquiring new technologies is more feasible than it was just a few short years ago. This is a risky thing to do, but the simple fact is that FB can afford it.
The revenue and earnings growth of Facebook has been phenomenal over the last year and that ability to monetize seemingly anything and everything is why, despite the price tag on these acquisitions, I’m still bullish on the company. A couple of months ago, as FB was falling sharply, I recommended buying on that dip, and I do on this one too.
It is interesting to me that Mark Zuckerberg described the acquisition as “...a long term bet on the future of computing.” They are not alone in betting on that, Google (GOOG) has glass and almost every tech company seems to be looking at some form of investment in VR. In that environment, punishing a company for being bold when it can afford to makes no sense.
The second big news this week was also tech related. On Wednesday, King Digital Entertainment (KING), the makers of Candy Crush went public. The poor, some might say disastrous, first day of trading had several people drawing grand conclusions. Apart from the obvious comments about the stock getting “crushed” there were several people heralding it as the first rent in the fabric of a bubble, either in social media, tech in general or IPOs.
There is, of course, another way of looking at it. The fact that KING didn’t add 20 or 30 percent to what looked like a rich offering price on the first day of trading is evidence that there is no such thing. Traders still seem to be making realistic assessments of a company’s value and potential, rather than buying into a sector just because it is trendy. I will freely admit to having never played Candy Crush, but regardless of the appeal of that particular game, I would be reluctant to invest in a company based on success with one product in an inherently fickle market.
If, in the not too distant future, KING is able to fulfill the CEO Ricardo Zacconi’s vision of “a network of players, of loyal players, who play our portfolio of games," then the company has a future. Given the inherent trendiness of online gaming, however, I would want to see evidence of that before parting with cash.
As to the broader implications for a bubble of some kind, once again, this will be clearer over the next couple of weeks. If KING recovers from its poor start and roars over that time, then I will see it as a worrying sign. It would indicate to me that there are still plenty of retail investors who will buy into an unproven concept as long as it is in the right sector and that is the stuff of which bubbles are made. Absent any news, KING is most likely to remain around these levels or even drift a little lower until there is evidence of more broad based revenue generation. If that is the case, then we can all probably breathe a little easier.
I didn’t respond to either of these “momentous” events at the time they were hot for one simple reason. They are both impossible to assess in their long term implications. For now I would be wary of any grand, overarching interpretations and would rather judge each stock on the “what have you done for me lately” criterion. On that basis, FB has done nothing to temper my bullishness and KING has done nothing to make me a buyer.