Having lived through the bursting of the dot-com bubble (which I will write about in my investing adventures series), this particular IPO reminds me of some of those companies.
Now I bought GOOG in the latter half of 2008 as my Internet play when the entire market was going into the shitter as a result of the global financial crisis. The rationale for that was I’d missed that IPO and the subsequent run up because until 2007, I paid little attention to the market after having gotten my ass kicked earlier in the decade (the details of that forthcoming in the before mentioned series). However, any potential entry point needed to be below $300 share. That occurred in mid-November 2008. Basically, my play was the mobile ad space since smartphones were going to be heading on upwards trajectory.
Now I always felt this whole ad thing was a rigged game (SEO and how lot of fake sites exist for link baiting in order to game the results provided in search), but this itself is another story for another time. I’m also not naive about the amount of information which Google likes to mine from its users. I willingly use Google services (because I invested in it) but have always been careful what bits of personal information I provide to them. Furthermore, I rarely if ever see any ads when I’m at home because I use multiple forms of filtering including blocking ad serving sites right at my router (then also at the browser level for good measure).
Basically for this post, I’ll just say I know about that part (just like how back during the dot com bubble, a large number of the metrics used to measure those sites back then were rather dubious), but I’m also not naive enough to not play the game while it still has some steam left. Myself, I don’t “use” Facebook. When I say “use”, I don’t have an account there under my real name as I took issue with how they used to deal with their privacy policies and am taking a wait and see approach as to how they deal with them over time. I do have accounts there though based on the names of food and software products with those names written in Japanese kana/kanji. If a “WTF?” is coming to mind, yes, that is exactly my point.
One metric that sites like Facebook use are the number of users they have online. The corporate legalese forces these companies to show a “best effort” face that they’ve done their best to weed out fictitious names or duplicate users in order to get a more accurate representation of the numbers. Eyeballs and advertiser reach are basically the end game here because with Facebook, that is what counts. These sort of metrics however can be easily gamed and as I mentioned before, the whole online ad business is not all on the up and up either (to be clear, I am stating this as opinion because I’m not presenting factual evidence in this particular post). Regardless, anyone can create multiple accounts on sites like this so one needs to extrapolate a percentage when doing their due diligence in determining whether to invest in Facebook or not.
One thing is certain, the insiders will make a great deal of money. What is less certain is how well the retail investor will do as I feel that it will be oversubscribed from the get go, and that the valuation may skyrocket in the same way that Akamai Technologies did on its opening day. That IPO was priced at $26 but due to demand, opened at $175. By the end of 1999, it was trading at over $300 share. I should know since I was able to secure preferred stock (pre-IPO) from one of the brokerage firms I was with and as with preferred stock, those get converted to common stock upon completion of the IPO (I’ll leave it up to the reader to find out exactly how much common shares were provided for each preferred share). Once the hold period expired, I sold the bulk (90%) of those shares at around $300 – making it one of my biggest short term gainers (the profit was in excess of a quarter million). AKAM also ended up below $20/share after the dot-com and tech bubble burst in 2000. Then after 9/11, when the entire market went into the shitter, it fell below $4/share (it should be noted that co-founder Daniel Lewin died on AA Flight 11; the first plane which struck the WTC). We’re talking over 95% loss in total value.
The point is this, Facebook could sky rocket but it is anyones best guess how long it will stay there. Look at the Groupon IPO for example. The insiders and underwriting firms are the ones who are going to make like bandits. External events are always an unknown factor but the smart money will usually have made their money (and insiders have preferred pricing and large quantities resulting in the same). So the question is who will end up left holding the bag at the high? At least to me, Facebook has short term play written all over it and there is going to be massive shorting on it once the gas runs out. Since I’ve sworn off any form of day trading and using leverage of any sort, I’m just going to sit this one out because I’ve been there and done that. Saw huge gains BUT also gave lots of it back when the entire market caved, seen the highest of highs and lowest of lows. My risk tolerance is still high but not to the level of wanting to play that game of chicken again.
The Joy of Tech actually has a tl;dr version of the above in cartoon format…
And just as a final disclaimer, I began divesting myself of GOOG when they began showing an interest in acquiring Motorola Mobility – MMI (dead weight which will make itself known if the deal wins regulatory approval). I exited my entire position back in January 2012 after waiting out the final runup back over its previous high. I plan on using the funds from that when the inevitable post earnings pull back in AAPL occurs as well add more ARMH and take a new position in QCOM on its next pull back (that is another one from the past which I used to own when it was last near its all time high before the bubble burst).
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