"I'm mad as hell and I'm not going to take this
Howard Beale in the movie "Network"
AND Steve Reitmeister about Facebook (
) IPO euphoria. Especially as Apple (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
Could it truly be worth more than $110 billion some
Yes. But the odds are just far too long on that. I don't want
to bore you with all the forensic accounting on this one. Just
consider some of the longer, more established and INFINITELY more
profitable firms than Facebook who have market caps just under
that of FB's.
American Express (
Home Depot (
Walt Disney (
Yes, this is eye opening. So it's clear that they need 1001
things to go right to deserve to be at these lofty heights.
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
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
a LOT less often.
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
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 Netflix (
) and Green Mountain (
)…there will be a day of reckoning. And that will be the first
time that earnings or sales do not meet up with lofty
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 price.
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 fine.
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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