Caught Holding the Facebook Bag
In numerous emails, I was called insensitive for my having described retail investors as "unsophisticated and greedy speculators that got what they deserve." Aside from the fact that I was blatantly misquoted in these love-filled notes, I was more disappointed as it seems nothing was learned through this event. Each note suggested it was everyone else's fault except the investor's. However, as I read each one of them and try to put myself in their shoes, fundamentally, I just could not sympathize for what was the result of greed. But it was not because I did not try.
Though I angered some investors in my analysis, disappointingly, I think I was somewhat reserved in my appraisal of the situation. The embarrassment surrounding the stock's plummeting valuation and suspicions that surrounded the failed trade confirmations by Nasdaq have become a significant mess -- one that Wall Street would much rather leave up to someone else to clean up.
What this means is that nothing will likely get done and we can expect something like this to happen again.
With the stock having now closed at $32 and trading at 73 times earnings, there is no question that it is still too expensive -- particularly when appraised on a price-to-cash-flow basis. Now that the hype is over, investors want to know two things. First, when is a right time to place a bet? And second, what guarantees are there that it can be sold at a higher price when it's ready to be sold?
This goes back to that all-important question -- what is social media worth? Once investors arrive at that answer, it should be followed with a system of applying the proper valuation to the stock.
There is no question that Facebook has all of the makings of a successful company -- one that can certainly grow into its valuation and produce the type of earnings to justify its IPO hype. However, to what extent? This is the part that Wall Street still has not figured out.
Disappointingly, investors wanted to re-live the pre-tech bubble IPO days where everything soared 50% on their first day of trading and valuation metrics were only for geeks -- while forgetting the operative word: "bubble." I think eventually the company will prove that it was more than just a fad, but it has to first prove that in addition to being a good idea, it has a better underlying business.