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Here are highlights from Friday's Analyst Blog:
Why I Am Shorting Facebook
"I'm mad as hell and I'm not going to take this
Howard Beale in the movie "Network"
AND Steve Reitmeister about
) IPO euphoria. Especially as
) (truly the greatest company on the planet) trades at just 10X
earnings when you back out their large cash position.
This is a classic case of a great company, but a poor
investment. Meaning that I am impressed by what they have built and
think it is another great American success story. Unfortunately
there is too much laughing gas pumped into the FB story that people
can't see straight when it comes to what price to be paid for
shares. And that is why it's ripe to be shorted.
Could it truly be worth more than $110 billion some day?
Yes. But the odds are just far too long on that.
Let me share with you what I believe are the 3 main reasons that
Facebook will not be able to generate the profit needed to be worth
the current valuation.
1) The only way to make more money is to advertise more to
clients. And every step they take to advertise more to customers =
higher invasion = lower satisfaction with the user experience.
Certainly there is more money to be squeezed out of the company,
but I think they will run into some speed bumps on this front.
2) Most people I know have gone through the following cycle with
Facebook. So it's good that they are adding new members…but
eventually most will become infrequent users.
a. Discover it.
b. Become completely addicted to it checking in multiple times
c. Befriend everybody and their mother
d. Hate that they have befriended far too many people that they
don't want to stay in contact with
e. Contemplate deactivating their account
f. Become much, much less involved. Maybe checking 1-2
times per week.
And if you say to me that it's the younger generation that is
hooked on Facebook, I say you are right. And when they get jobs and
have families in the future, they too will use FB a LOT less
3) In general websites that have "sticky" content do not command
high advertising rates. Meaning that if the customers are too
interested in the content on the site, then they actively click to
the next page, photo, video etc and don't pay much attention to the
ads. And if they don't pay much attention to the ads, then the
rates they can charge for the ads will be low. (I have some
experience with this as I have run Zacks.com since 2001. And headed
our ad network sales team for 5 years). Remember that
General Motors Company
) just pulled their ad buy from Facebook because they were
ineffective. I assure you there will be many others. The end result
will be much lower ad rates than most people are using in their
Facebook business models.
This short may not pay off today. Or even a couple months down
the road. But just like
)…there will be a day of reckoning. And that will be the first time
that earnings or sales do not meet up with lofty expectations.
Note that I am only shorting a small position at this stage.
That is because there may be some IPO euphoria that lasts for a
while pushing shares higher. So I expect to short more shares down
the road. That should probably be before the first wave of lock up
folks can sell 91 days after
launch. Quite often that selling action pushes down the share
Here is the only trick at this point. I have seen varying
opinions of when people are able to short newly IPO'ed shares. They
say it can be the first day IF the brokerage firm you are using has
shares to pull from. Some will and some won't on day one. But
probably within 3-4 business days those shares will be there and
whatever entry price we get will be plenty attractive enough. So
keep trying to put in your order and whenever it clears will be
What is my target price?
I suspect this will get a 25-50% haircut at some point down the
road. The only question is when. I don't mind having it on the
books for a long time to see it come to fruition.
Are you ready to take your rightful place in history by
declaring that you shorted Facebook right from the outset? If so,
then put in your trade.
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