By
Akram's Razor
:
- "A face trapped in a book shall bring the darkness, and all
in the valley shall lose sight." Akadamus, 1555
-
Y-Combinator Cofounder Warns of
'bad times'
ahead in Silicon Valley
Turns out I have an ancient relative who already foresaw the
Facebook (
FB
) IPO leading to limited visibility in Silicon Valley. Now onto the
meat....
According to a Reuters
article
, Egypt has officially banned trading in all foreign securities.
Why you might ask? Facebook's IPO. By the way this is not another
attempt to make fun of Facebook's IPO debacle, this is actual
news.
What's next? Blaming Facebook's IPO for the problems with
Spain's banks? Maybe the weak unemployment report in the US can be
blamed on Facebook's IPO as employers were too busy looking for an
allocation instead of focusing on hiring. This whole Facebook thing
is getting just a bit ridiculous, and this is coming from a person
who three weeks before the IPO sent out a note that consisted
solely of, "What comes after Facebook? Nothing, be prepared to act
accordingly."
Yes, the Facebook IPO was a failure in the sense that the
underwriters left no room for immediate upside or momentum. There
is no doubt about that. But at an opening trade of over a $120
billion valuation Facebook hit my bubble target range of $120-$140
billion instantly. There was nothing left to do but short or sell
if you'd been buying at much lower valuations over the last year or
two. And with Facebook's failure so came the end of the party,
which was something I had been expecting as any IPO that has a
standing crowd in Times Square waiting to watch its first trade is
hard to miss as a sign of a market top. But at a present enterprise
value of $55-$60 billion (depending on your share count) Facebook
is now at a roughly 40% discount to that first trade. To someone
like me who loves looking for contrarian short selling
opportunities, hyped sector bubbles, and broken business models
this discount is incredible. If shorting growth were this easy,
Angie's List (
ANGI
) would be a $2 and Amazon (
AMZN
) at $75 right now. But what about the headline articles about the
stock trading down to $9, $15, $20, or even $25; don't they imply
significantly more downside?
The short answer is absolutely not. Do some analysis and you
will understand where I am coming from. Facebook's 2011 Operating
Margin was 48%. Their EBITDA was $2.1 billion. That means this
company is trading at a trailing enterprise value to EBITDA
multiple of between 26-28x. If you are a deep value guy that
multiple is pretty crazy, but if you are a market realist it
shouldn't even cause you to blink. Consider some comparable
trailing EV/EBITDA multiples of some loved stocks: Lululemon (
LULU
) 30x, Chipotle Mexican Grill (
CMG
) 27x, Amazon.com 45x, Salesforce.com (CRM) 70x, Linkedin 100+x
(LNKD).
Now, tell me does Facebook look expensive?
I didn't think so. This is the premium Internet brand on the
planet after Google (GOOG) (some may argue ahead of Google but I
still defer to the king of search), and it is trading at pretty
decent discount to plenty of stocks in the online space and 'loved
brand' growth story space. This is happening because Facebook's
stock is caught in a negative feedback loop the likes of which you
rarely see (think BP around the spill for a comparable), and thus
suffering from massive reality distortion. Which by the way is fine
with me as I was not buying this stock at $45, $35, or even $30.
But when I read Henry Blodget arguing the fair value is between
$18-$24, and random stories pegging it at $9, and sensationalist
articles saying the company won't exist in a couple of years; it is
hard for me to not get interested in what is going on. And when
Egypt uses Facebook as an excuse to force through regulations that
are designed to stem capital flight out of the country under the
guise of Facebook's IPO failure; I get super interested.
So, what is the bear thesis on the stock at this point? Simple,
it is that Facebook won't grow fast enough. As a short seller, I
can tell you that if that is all you have at these multiples get
ready for some Facebook pain because that matter won't be resolved
anytime soon. Yet, here is the market giving you a rare pricing in
of Facebook's growth slowing markedly and permanently, with little
to no reason to believe such a drastic slow-down is a foregone
conclusion. And by the way, if you think Facebook's growth
'warning' was actually a warning you need a market wake-up call.
Facebook did precisely what a smart conservative management team
does well, they played the street. If you think this is not a beat
raise company setting the bar low 4-5 weeks before their quarter
closes you are really underestimating Mark Zuckerburg. See, I know
a promoter CEO when I see one, and this is not a promoter CEO. He
is focused on the task at hand and is clearly someone who thrives
on competition. He is not going to talk up his stock because he
knows he doesn't need to. At this point that should give you
comfort if you want to take the other side of the sentiment trade.
Personally, I'd look at sandwiching the q2 quarter close/ earnings
report window in the options market to maximize return as I think
the stock really starts to rally.
And what if I am wrong?
The way I see it in over a decade plus of short selling I have
learned that growth stories reprice instantaneously on the first
real disappointment. Until that day arrives, they will remain
frustratingly overpriced no matter how seemingly obvious the
inevitable sharp slow-down may seem to you. In Facebook shares, the
market has almost flipped this proven well established market rule
on its head. The only time this ever happens is when a wave of
negative sentiment overwhelms a stock and then through the media
successfully morphs into a formidable reality distortion field.
When that happens, you can actually make some very good money going
long.
Disclosure:
I am long [[FB]] via calls as of yesterday close
See also
A Fantasy Football Restaurant Stock Preview:
RB's
on seekingalpha.com