Financial Mags...splain to me: Facebook IPO

[Art Shirk]

If this thread and the incessant squawking on CNBC and Bloomberg indicates anything, it goes to show that access to hundreds of millions of people that can't really be quantified and a need for monetization that can't be qualified equals gambling. Handicapping this one is an exercise of faith with little analogy available. Finding those extra few percentage points, gleaned from whatever metric one uses, above or below a crapshoot isn't substantial enough for heavy involvement. Warren's quote is pretty apt here. Fun to talk about I guess though.

[DasBlunt]

Only Restricted Stock Units issued this year can be flipped. All others have a lockup for 5-6 months.

So much for a reversal..

Most of the ones with that type of stock instantly flipped, I read.

Investment firms were some of the original investors, right.

I cry some kind of illegal price collusion.

[philth]

I dont really give a shit about the FB valuation but the behind the scenes stuff is getting very interesting. Nasdaq has some real problems and may have to make its clients whole to the tune of $100mil plus. I'm hearing they will not release the tape or time and sales from friday. Almost unheard of in equity markets.

[OldLarry]

I dont really give a shit about the FB valuation but the behind the scenes stuff is getting very interesting. Nasdaq has some real problems and may have to make its clients whole to the tune of $100mil plus. I'm hearing they will not release the tape or time and sales from friday. Almost unheard of in equity markets.

The 13 million they say they are trying to set aside won't even cover lunch for the lawyers that will be involved.

[Benny Profane]

Psssst........don't tell the muppets..
.



http://www.businessinsider.com/exclu...ook-ipo-2012-5

[philth]

This worth a read as well

How Facebook Fucked Up Its Own IPO
Posted By Barry Ritholtz On May 22, 2012 (7:21 am) In IPOs, Markets, Quantitative, Trading

What a piece of work is a man, how noble in reason, how
infinite in faculties, in form and moving how express and
admirable, in action how like an angel, in apprehension how like
a god! the beauty of the world, the paragon of animals—and yet,
to me, what is this quintessence of dust? Man delights not me—
nor woman neither, though by your smiling you seem to say so.

-Hamlet, Act 2, Scene 2



Ahhh, the delicious cruelty that is irony! The ineffable loss, the sadness at the sudden realization that this was your own doing — an easily preventable mistake, that harsh painful sensation in the pit of your stomach when you realize that you have no one to blame but yourself . . .

Our story so far: Facebook, a wildly overvalued momentary internet phenomena led by an arrogant 28 year old man-child, decided to treat the process of going public with the same respect they do their users’ privacy, which is to say, with none at all. So they went public more or less unlawfully over the past two years, allowing 1000s (or more) outside investors to acquire substantial stakes via secondary markets from their employees and early investors. Note this is within the company’s control, and could have been stopped, but they elected not to do so. When the clamor to dump shares overwhelmed these markets (but not the hype surrounding them), FB decided to do what was described as an IPO, but was in all actuality a secondary.

Flattered and cajoled by the bankers and wankers at Morgan Stanley and Nasdaq respectively, the man-child allowed the Facebook secondary to be bungled by these once-great-now-shite financial firms.

How?

Let’s begin with Morgan Stanley, who wildly over-priced the offering price (and size) by about 4X. They were hemmed in by the inefficient, opaque, clumsy secondary markets that had originally over-priced FB’s shares. Forget $25B, had Morgan Stanley told the man-child and his team that a $40-50B cap was more than reasonable, they would not have gotten the deal. Hence, the once esteemed bankers, down from $100 in 2000, now trading at a paltry $13, have become a shadow of what they once were and were worth . . . So they took the deal.

Then, while Facebook was on the road presenting to institutional investors, Morgan Stanley’s consumer internet analyst actually cut revenue forecasts for the company (Basis: FB’s latest SEC filings).

I cannot recall that ever occurring during an IPO roadshow.

With the stock over-priced due to the secondary markets and relentless media hype, and the lead underwriter telling the company what they wanted to hear, the next decision was to hand over the stock to an exchange. The choice was between two utterly corrupt institutions — the NYSE or the Nasdaq. Given that both entities had sold their souls long ago to the HFT traders, with their co-located servers and algorithms, it looked like the choice didn’t matter all that much, since each appear to screw over investors equally, allowing front-running by HFTs and other should-be-illegalities to occur.

With the benefit of hindsight, we can see that the Nasdaq was the wrong choice. Without a specialist to deal with the onslaught of 1000s of spoof quotes per millisecond via HFT algorithms, their systems was overrun by the bots. Here is the FT’s take:

“The question now will be: was Nasdaq the victim of catering to its best customers, the high-frequency dealers who provide the liquidity that attracts investors to the market, who wanted to keep cancelling quotes at millisecond increments during IPOs?The rationale for the design of Nasdaq’s IPO cross system was that IPOs, unlike normal opening and closing auctions, have no pre- or after-market trading. Therefore, IPO prices could fail to reflect where the market really stands, and add risk to market-makers.

The irony here is that Nasdaq has also been among the exchanges leading the charge to try to damp down excessive cancellations, in cases when there are more than 100 quotes per actual trade executed. In the case of cancellations, it is traders’ software – their algorithms that make trading decisions – that is in question; whether poor design makes them wasteful with their trading messages.”

What was that about HFTs being there to add liquidity? (Please tell me that the FT was being snarky).

Nanex explains this further:

Only High Frequency Traders (HFTs) can cancel quotes at that rate. And ironic enough, it was mostly HFTs that benefited later when Nasdaq quotes stopped coming from the Securities Information Processor (SIP) which transmits quotes for everyone who doesn’t get the premium direct feeds. The nearly 2 hour outage, from 11:54 to 13:50 (See Charts at link). Those who are co-located and get the direct feeds, namely HFTs, didn’t experience this problem, as trades continued to come from Nasdaq.

So even the choice of exchange worked to screw this up yet further. While the NYSE still engages in the same sort of HFT shenanigans Nasdaq does, the specialist could have controlled the high frequency firehose, electing to turn it off (or just ignore it) in order to make an orderly IPO market.

~~~

Thus, what we see are a series of bad decisions made by Facebook’s executives going back many years. The insiders got greedy, too clever by half, in how they used secondary markets. They picked a bad banker and an awful exchange. The stock broke syndicate on Monday morning, and I would not be surprised to see it eventually cut in half from the way-too-high offering price.

Compare the Facebook IPO with that of Google — there is a world of difference between the business models, earnings at IPO, valuations and multiples. Een the Dutch Auction process Google championed had worked out well for all involved — especially retail investors.

What a piece of work is man, indeed . . .



Previously:
Less than meets the eye at Facebook (Washington Post, February 11 2012)

Facebook’s IPO: What does it mean for you? (Washington Post, May 16 2012)

Sources:
Facebook IPO: How HFT caused the opening delay, and later benefited at the retail customer’s expense
Nanex, 18-May-2012
http://www.nanex.net/aqck/3099.html

‘Raindrops’ raise questions after Facebook IPO
Telis Demos in New York
FT.com, May 21 2012
http://www.ft.com/intl/cms/s/0/c1e84...44feabdc0.html

Morgan Stanley cut Facebook estimates just before IPO
Alistair Barr
Reuters 12:19 a.m. CDT, May 22, 2012  Â
http://www.chicagotribune.com/busine...,5871771.story

Article taken from The Big Picture - http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2012/05...p-its-own-ipo/

[DasBlunt]

Psssst........don't tell the muppets..
.



http://www.businessinsider.com/exclu...ook-ipo-2012-5

The best quote below,

"In the meantime, it's hard to conclude anything other than this:

In one of the biggest IPOs in history, in which a huge amount of stock was sold to small investors, privileged Wall Street insiders once again got top-notch information...and individuals got the shaft."


Read more: http://www.businessinsider.com/exclu...#ixzz1vhhx0jLs

[spindrift]

So he missed out on a lot less stock price growth is what you are saying?

What is a "sensible" upside valuation for Facebook?

What I am saying is that he was a simple idiot who got in over his head. He understood nothing of the underlying fundamentals. Nor did most of the people chasing superficial metrics whose usual interpretation is loaded with assumptions that demand a certain level of understanding in order to be useful. He and all the dunces who hailed him a hero missed literally everything important that was in play in the Internet economy and the structures of the companies growing up in it. He truly understood nothing of the things going on in terms of how Amazon was setting up, both tactically and strategically, for future cash flows and profitability (ie "losing" money in the short term to due to investing to maximize future returns - aka maximizing NPV). Similar nonsense was spewed about Google in several major articles roughly a year before the IPO --- more "sure they have clicks, but they have no business model to monetize it and are therefore doomed to failure" stuff. The nonsense goes on and on.

Want to see how badly he and his ilk missed in the big picture? Think you'd rather have bought and held until today the DOW or NASDQ or maybe a "real" company like GM vs AMZN the day AMZN peaked pre "bubble burst"? Or maybe grabbed and held a sensibly managed Internet Index?

I don't understand modeling FB as a loser based on simple backward looking metrics. I think it demands a more nuanced view of growth and monetization opportunities and risks.

I don't know what FB should be valued at - that fog of war thing makes precision hard (and even in the best of circumstances, I question precision in this sort of thing). Even if I had a firm notion of valuation, I'd certainly not pick a number here. However, I will say that I believe the odds of it being double or triple today's value in a couple years are far higher than the odds of it being down 50%. Time will tell. One thing I'll buy into: there is enough risk and volatility in this class of stock that it should only represent the risk end of any portfolio. Certainly not the place for a 60 year old of modest means to put their money. Or, for that matter, anyone without the ability to have a "risk" end of things they can survive getting hammered on.

To reiterate yet again - it is hard to tell what the future holds. But it is painful to see folks just parrot crazy superficial stuff from analysts and reporters who know nothing of running a business (let alone an innovative one), who would not know a bucket of shareholder value if they tripped on it - and generally have no clue whatsoever how to generate a penny's worth of it...

[LeeLau]

To be fair - I shorted ETYS, OSTK, IPET, VALU (remember them? Oh how I treasured those days - dot bomb) etc etc etc successfully and gave back a nice chunk of that to AMZN. Negative gross margins.. its pretty hard not to look at that on any set of financials and not shit your pants with pure joy. I don't think Ravi was the only non-believer. His argument was pretty compelling.

When you say he "understood nothing of the underlying fundamentals" I'd say back to you that he was applying Graham-Dodd. As to why AMZN succeeded - well all I can say back to you is that I'm now an AMZN long but that it took me a long time to also appreciate just how insidiously they are and that was only after I became a user.

I think you should take a long hard look at what you just wrote about the Internet economy and look at how many companies executed in the Internet economy. Then tell me again how many Internet companies survived their poor execution.

Back to the original post - I have no particular insight into how FB will or will not execute.

[Hugh Conway]

He understood nothing of the underlying fundamentals. Nor did most of the people chasing superficial metrics whose usual interpretation is loaded with assumptions that demand a certain level of understanding in order to be useful.

Who the fuck understood that on either side of the table? I'm stupid - explain to me how one can sensibly and with knowledge model shit that hasn't been come up with?

Amazon annualized 5.8% from peak to now. that's hardly stunning. I'm a long time Amazon customer but I struggle to see how my buying patterns are profitable for them, much less will grow to be wildly profitable.


look at all the bullshit bull calls on JDSU and the rest of the telco sector in the 90s. those have never recovered and all made "real" products. for some in the sector the forecast growth in traffic has arrived but the revenue (for them) hasn't.

[LeeLau]

Suria also wrote this which is one my favourite pieces "The Other Side of Leverage" about Vendor financing for telco operators and CPE providers. Using his analysis i remember pulling together candidates that had the shittiest balance sheets. Anyone who worked in telco land back then will remember names like Teligent, XO, Winstar, Covad, XDSL, eSpire which then led to the joy of finding dark fiber blue-sky idiots who bought the vendor-financed shit like Global Crossing, 360Networks, Level 3. All fantastic short candidates employing Suria's reasoning.

Ravi Suria was right more often than he was wrong.

[spindrift]

To be fair - I shorted ETYS, OSTK, IPET, VALU (remember them? Oh how I treasured those days - dot bomb) etc etc etc successfully and gave back a nice chunk of that to AMZN. Negative gross margins.. its pretty hard not to look at that on any set of financials and not shit your pants with pure joy. I don't think Ravi was the only non-believer. His argument was pretty compelling.

When you say he "understood nothing of the underlying fundamentals" I'd say back to you that he was applying Graham-Dodd. As to why AMZN succeeded - well all I can say back to you is that I'm now an AMZN long but that it took me a long time to also appreciate just how insidiously they are and that was only after I became a user.

I think you should take a long hard look at what you just wrote about the Internet economy and look at how many companies executed in the Internet economy. Then tell me again how many Internet companies survived their poor execution.

Back to the original post - I have no particular insight into how FB will or will not execute.

How many motor car companies survived their execution at whatever level in the early days of the auto industry? Running a business well is hard under any circumstances. Doing that *and* surviving a moment when your air gets cut off is even harder.

I'd say you actually support my point. You can have GAAP numbers that seem peachy and hide structural problems. And you can have GAAP numbers that look terrible and mask structural goodness. Likewise for typical market metrics. While the "traditional" value investing approach tends to avoid certain problems, it is loaded with its own set of significant land mines when the future is not likely to follow a very simple trajectory from the past through today and into the future.

FB is not likely to follow any simple trajectory. And, like most young tech based companies at an equivalent stage of the game, it lacks enough history and economic maturity (as in fully baked business and execution model) to draw any kind of simple line into the future with confidence.

[spindrift]

Who the fuck understood that on either side of the table? I'm stupid - explain to me how one can sensibly and with knowledge model shit that hasn't been come up with?

You need a certain knack for informed speculation... Really. It is most certainly not a space that engenders comfort if you want anything resembling certainty. However, there were people who got it. Even a few sell side types (including the few I respected, anyway).

And I'll say it again - IMO when Suria was right, it was because he was lucky. Either true dumb luck or because the problem space he touched was one where the most vanilla textbook assumptions applied. The damage his lack of skill and ability caused is almost beyond calculation.

I'm not gonna run off and do this, and I do not have numbers at my fingertips, but lets pretend Amazon wanted to maximize short term profitability the past few years. What would their numbers look like if they were squeezing for profits and not building FCs, investing in core cloud architecture, etc.? What would their P/E ratio look like? Think they'd be smart to do that?

[spindrift]

jesus man if you are going to bust my balls about "loser based on simple backward looking metrics" why do you dig out the auto-industry? Often under-capitalized small shops run by entrepreneurs that consolidated or went tits up rapidly, rarely with any kind of instititutional financing or even knowledge of the financial world. The auto-industry is the lazy-ass example trucked out.

Disagree. It is a truly perfect example in many dimensions. Including the fact that it became, for a time, the foundation of our economy. Just as what John Doerr called (paraphrasing from memory) the "largest legal generation of wealth in history" is becoming. But that's just my .02... in fact my last .02 on this...

[Hugh Conway]

Disagree. It is a truly perfect example in many dimensions

If you completely neglect the role of VCs like Doerr, and professionally trained management and bankers, sure. You know, all of those who are "instrumental" to the success of the current crop.

[LeeLau]

I think we're coming from different worlds. I worked in a space where I was looking for shitty business models poorly executed. And at that time and space I found them. And accordingly viewed any argument that it's different this time with the suspicion it deserves.

It seems to me (reaching a bit here) that you're more sympathetic to the new paradigm kind of thinking and looking for the rare gems that can do that. IN doing so, my opinion is you're too dismissive of fundamentalist value-based thinking. As a sideline my experience showed me how GAAP numbers could be cooked even on something as uncookable as cash flow statements so yup - I agree with you that financials should be viewed skeptically and just as a rough screen.

I agree (retrospectively) that AMZN is one of those rare gems that beat the status quo. I'm a believer because of their cloud strategy and the fact they buy content to fill their pipe and to peddle their crack and do it so well. They will be the Walmart of e-commerce if they're not already.

As to FB - I think there's a huge opportunity for them in analytics but I hate their attitude to privacy so much that I'm much more pre-disposed to bearishness with them than I am to seeing anything good in FB (the public company). But I'm a FB user and I think they've done a tremendous job building their little FB ecosystem so I can't see myself shorting them. Which is a longwinded way of saying No Position.

I think we agree much more than we disagree. Thx for the rare civil discussion

How many motor car companies survived their execution at whatever level in the early days of the auto industry? Running a business well is hard under any circumstances. Doing that *and* surviving a moment when your air gets cut off is even harder.

I'd say you actually support my point. You can have GAAP numbers that seem peachy and hide structural problems. And you can have GAAP numbers that look terrible and mask structural goodness. Likewise for typical market metrics. While the "traditional" value investing approach tends to avoid certain problems, it is loaded with its own set of significant land mines when the future is not likely to follow a very simple trajectory from the past through today and into the future.

FB is not likely to follow any simple trajectory. And, like most young tech based companies at an equivalent stage of the game, it lacks enough history and economic maturity (as in fully baked business and execution model) to draw any kind of simple line into the future with confidence.

[LeeLau]

You can't. You roll the dice with 100 companies and hope that 1 hits jackpot, 9 do OK, 90 fail and that the 90 that fail don't outweigh the 9+1 which succeed. That's the way of the angel and the VC.

and you invest in management first; ideas second - IMO

Who the fuck understood that on either side of the table? I'm stupid - explain to me how one can sensibly and with knowledge model shit that hasn't been come up with? .

[Hugh Conway]

You can't. You roll the dice with 100 companies and hope that 1 hits jackpot, 9 do OK, 90 fail and that the 90 that fail don't outweigh the 9+1 which succeed. That's the way of the angel and the VC.

Exactly, so if you are going to bust Ravi's balls about being "lucky" you've got to be honest with the original premise. That there were a whole bunch of losers out there.

Going back to amazon, as was recently pointed out:
http://pandodaily.com/2012/05/05/nob...doing-does-he/
other than an implicit assumption that "they know more than anyone" - which may be true, but has often proved false in the past - how do you produce intelligent analysis?

[LeeLau]

I think spindrift's comment about revisionism is kind of funny ironic because Ravi Suria's calls were really good. He did a lot of indepth leg work when he blasted vendor financing. Talked to customers, talked to end users. He found out about channel stuffing before it became in vogue. He didn't clue in to inventory being booked at ridiculous prices just to meet debt-equity covenants but his research led to others (like idiots like me who followed his tracks) to do the homework to find out how rigged the telco game was being played at all levels - from last mile, narrowband, broadband. He wasn't just a number-cruncher; he did a ton of primary research and backed it up. Funny thing is that there's no mention of him since 2005 or so; i Hope he made out like a bandit and is skiing 200 days a year or maybe eating chappati 200 days a year cause he loved his food.

And going back to Amazon, I'm basically long Jeff Bezos's mad genius.

[Hugh Conway]

And going back to Amazon, I'm basically long Jeff Bezos's mad genius.

Not necessarily a bad position to have; if it doesn't work out at least you have voting rights. Unlike for FB investors who have to be long FB and have no choice because Zuck has the rights.

[powder11]

What has google ever gotten out of me? Ive never paid google a dime and its worth many billions.

If you use Google as a search engine or have a Gmail account, you have given Google shit loads of personal info that they've cleverly used to make money off as market research data. It's like a Market Research company except instead of paying people to attend focus groups, you unwittingly and passively give them info about yourself. Same with Facebook. They dont make much money off someone clicking on an ad. They make money by gathering personal info off 900 million people and delivering targeted advertising to your doorstep everytime you log on. Personal info that people typically would never reveal to anyone other than close friends on the interwebz and then market research engines mine through that data to find trends and target demographics for mass advertising.

It's a legit billion dollar industry and is the future of how market research data is collected. These companies are information companies. The information they gather is worth billions. Facebook will remain relevant as long as 900 million people keep them updated with their personal interests and habits. I'm no financial analyst, but I know enough about Wall St that a handful of fat cats have already made a shit load of cash off this deal and the rest remains to be seen.

[Brock Landers]

Exactly P11. The information they gain is worth a ton. Same with facebook, except it also acts as a platform for other things, something google has been trying to do for years (and google plus is actually doing to a lesser degree than facebook)

[Hugh Conway]

Exactly P11. The information they gain is worth a ton. Same with facebook, except it also acts as a platform for other things, something google has been trying to do for years (and google plus is actually doing to a lesser degree than facebook)

Brock dear - Google has had much more success with that platform thingy than Facebook has so far.

[ACH]

Brock dear - Google has had much more success with that platform thingy than Facebook has so far.

Not to mention their success with the mobil OS platform.
And, then there's this.

[iceman]

Not to mention their success with the mobil OS platform.
And, then there's this.

off-topic but it seems to me that buying Motorola might be a big mistake, Android seems like it has more upside than selling phones and now Google's in competition with the other manufacturers who are using Android, they can't be stoked about that. Just a random thought