Latepost Facebook: Sowing The Wind, Reaping The Whirlwind
Last Thursday, almost 24 hours prior to the initial world offering, I posted on what I thought would move on on the opening day. I argued that this was the most pre-priced IPO inward history, amongst transactions inward the mortal portion marketplace providing data on what investors would live on willing to pay for the stock. That was the footing for my sentiment that those expecting a large jump on the opening hateful solar daytime were probable to live on disappointed together with that this would live on the Goldilocks IPO, amongst a 10-15% bump at open. I also felt that the stock was overvalued past times almost a third together with that what happened on the opening hateful solar daytime would live on revealing non but for Facebook, but for all social media companies. The stock did opened upward up almost 12% together with faded real speedily to the offering cost past times the terminate of the day. In fact, without active back upward from the investment banks, it would accept dropped below. In the final few days, the stock has cratered, declining to almost $32 at the fourth dimension of this post. Here are the lessons I am taking away from this process:
Pricing versus Valuation
Pricing is an do of gauging need together with supply, reading investor moods together with determining what people volition pay for an asset, rather than what it is worth. Valuation is almost estimating what an property is worth, given its earning potential, increment together with risk. You tin enjoin whether an investor or analyst is a “pricer” or “valuer” past times looking at the tools that he or she uses. The tools of pick for most pricers are relative valuation (multiples such equally PE or EV multipes), where you lot assess how much you lot volition pay for an property past times looking at what others are paying for similar assets (usually other companies inward the same business), together with technical analysis (where you lot role charts together with indicators to gauge shifts inward demand). The tools of pick for “valuers” are either discounted cash period of time (DCF) or accounting based (building off mass value) models.
Influenza A virus subtype H5N1 cracking larn by of what passes for valuation inward corporate board rooms, investment banks together with portfolio administration is pricing, non valuation, together with the testify is clear, peculiarly amongst Facebook. In the weeks leading upward to the IPO, an terra firma forces of banks, led past times Morgan Stanley, was working on setting an “offering” cost for Facebook. While I am sure enough that in that location was an intrinsic valuation done somewhere along the way, I volition also wager that it was done to save appearances together with that it had fiddling or nada to do amongst the cost that was eventually set. To laid that price, my guess is that the banks used 2 variables: the prices at which investors were transacting inward the mortal portion marketplace for Facebook (in the mid-40s) together with the feedback that they were getting from institutional investors on how much they would live on willing to pay for the stock. Much of the chatter almost whether Facebook was a proficient purchase or non was framed inward terms of pricing, amongst the optimists controversy that it was a larn by because you lot were paying less per user than you lot were at other social media companies together with the pessimists controversy that it was expensive because it was trading at a much higher multiple of earnings or revenues than Google or Apple. Any travail at full-fledged valuation, where you lot confronted the dubiety together with attempted to brand estimates, was viewed equally an do inward speculation together with guesswork. I also mean value that this is why the conspiracy theories, article/SB10001424052702304707604577422063685311108.html?mod=WSJ_hps_LEFTTopStories" target="_blank">where Morgan Stanley fed within data almost futurity increment to institutional investors prior to the IPO together with where the pitiful retail investors were the final ones to know, are misplaced. I am convinced that the increment charge per unit of measurement together with the prospects of the fellowship were never key drivers inward how this stock was priced together with that if in that location is a storey here, it is i of ineptitude together with arrogance, rather than malice.
Momentum is delicate together with requires illusions
Momentum is a strong forcefulness inward markets but it is i that nosotros don’t empathise nonetheless together with don’t believe that nosotros ever will. It is after all non exclusively the footing for the madness of crowds together with behavioral finance, but also of that most feared phenomenon inward markets, the dreaded bubble. Not exclusively is momentum driven past times marketplace moods together with perceptions, but it is delicate together with based ultimately upon an illusion. After all, most momentum investors don’t sentiment themselves equally such, together with take away to rationalize their behaviour using “fundamental’ factors. Thus, inward the midst of every bubble, investors delude themselves that it is non a bubble past times looking for a proficient reason: that tulip bulbs would expire scarcer inward the future, that dot com companies would dominate every concern that the operated inward together with that the need for existent estate would ever outstrip supply.
In their ideal scenario, I am sure enough that the investment banks hoped that the momentum that they were detecting inward the mortal portion markets together with inward their conversations amongst institutional investors would proceed into the opening hateful solar daytime together with the weeks after. So, what happened on the opening day? I believe that the momentum shifted together with that the hubris of the fellowship together with the bankers inward the days leading upward to opening hateful solar daytime contributed significantly to it happening. Rather than keep the illusion that the offering cost was justified past times fundamentals, nebulous though they mightiness accept been, the parties involved seemed to completely abandon whatever illusions almost value together with made it a starkly momentum game. This was manifested inward the hiking of the offering cost to $ 38 on Th eve together with inward insiders inward the fellowship publicly bailing out at the offering price. Even the maddest of crowds, when constant confronted amongst proof that they are existence viewed equally suckers, volition wake up, together with to the dismay of the fellowship together with the banks, it happened an hr into the offering.
What now?
Much equally I would similar to believe that what has happened inward the final duet of days to Facebook stock is a vindication of valuation, I am a realist. There is no fury that matches that of a disillusioned crowd together with I believe that what you lot are seeing is momentum investors, who were promised quick riches if they bought Facebook stock, bailing out. Will they halt selling at fair value? Since they accept no thought what it is, why should they? If momentum shifts inward the past times are whatever indicator, you lot should run across the cost of Facebook drib non but to its intrinsic value (you accept mine, but yours may live on different), but to below that value. Since the fellowship is the poster-child for the “social media” sector, I mean value that you lot volition run across this momentum shift play out on other social media companies.
Would I purchase Facebook, Linkedin, Groupon or whatever other social media company? Social media is an umbrella nether which you lot accept various firms, approximately amongst to a greater extent than clearly defined concern models than others together with approximately amongst stronger barriers to entry than others, together with when momentum shifts, investors tend non live on discriminating. In the words of that eminent philosopher, Justin Bieber, you lot “never say never” together with approximately of these stocks are probable to live on bargains, sooner rather than later. If you lot are a value investor, you lot should live on ready.
Pricing versus Valuation
Pricing is an do of gauging need together with supply, reading investor moods together with determining what people volition pay for an asset, rather than what it is worth. Valuation is almost estimating what an property is worth, given its earning potential, increment together with risk. You tin enjoin whether an investor or analyst is a “pricer” or “valuer” past times looking at the tools that he or she uses. The tools of pick for most pricers are relative valuation (multiples such equally PE or EV multipes), where you lot assess how much you lot volition pay for an property past times looking at what others are paying for similar assets (usually other companies inward the same business), together with technical analysis (where you lot role charts together with indicators to gauge shifts inward demand). The tools of pick for “valuers” are either discounted cash period of time (DCF) or accounting based (building off mass value) models.
Influenza A virus subtype H5N1 cracking larn by of what passes for valuation inward corporate board rooms, investment banks together with portfolio administration is pricing, non valuation, together with the testify is clear, peculiarly amongst Facebook. In the weeks leading upward to the IPO, an terra firma forces of banks, led past times Morgan Stanley, was working on setting an “offering” cost for Facebook. While I am sure enough that in that location was an intrinsic valuation done somewhere along the way, I volition also wager that it was done to save appearances together with that it had fiddling or nada to do amongst the cost that was eventually set. To laid that price, my guess is that the banks used 2 variables: the prices at which investors were transacting inward the mortal portion marketplace for Facebook (in the mid-40s) together with the feedback that they were getting from institutional investors on how much they would live on willing to pay for the stock. Much of the chatter almost whether Facebook was a proficient purchase or non was framed inward terms of pricing, amongst the optimists controversy that it was a larn by because you lot were paying less per user than you lot were at other social media companies together with the pessimists controversy that it was expensive because it was trading at a much higher multiple of earnings or revenues than Google or Apple. Any travail at full-fledged valuation, where you lot confronted the dubiety together with attempted to brand estimates, was viewed equally an do inward speculation together with guesswork. I also mean value that this is why the conspiracy theories, article/SB10001424052702304707604577422063685311108.html?mod=WSJ_hps_LEFTTopStories" target="_blank">where Morgan Stanley fed within data almost futurity increment to institutional investors prior to the IPO together with where the pitiful retail investors were the final ones to know, are misplaced. I am convinced that the increment charge per unit of measurement together with the prospects of the fellowship were never key drivers inward how this stock was priced together with that if in that location is a storey here, it is i of ineptitude together with arrogance, rather than malice.
Momentum is delicate together with requires illusions
Momentum is a strong forcefulness inward markets but it is i that nosotros don’t empathise nonetheless together with don’t believe that nosotros ever will. It is after all non exclusively the footing for the madness of crowds together with behavioral finance, but also of that most feared phenomenon inward markets, the dreaded bubble. Not exclusively is momentum driven past times marketplace moods together with perceptions, but it is delicate together with based ultimately upon an illusion. After all, most momentum investors don’t sentiment themselves equally such, together with take away to rationalize their behaviour using “fundamental’ factors. Thus, inward the midst of every bubble, investors delude themselves that it is non a bubble past times looking for a proficient reason: that tulip bulbs would expire scarcer inward the future, that dot com companies would dominate every concern that the operated inward together with that the need for existent estate would ever outstrip supply.
In their ideal scenario, I am sure enough that the investment banks hoped that the momentum that they were detecting inward the mortal portion markets together with inward their conversations amongst institutional investors would proceed into the opening hateful solar daytime together with the weeks after. So, what happened on the opening day? I believe that the momentum shifted together with that the hubris of the fellowship together with the bankers inward the days leading upward to opening hateful solar daytime contributed significantly to it happening. Rather than keep the illusion that the offering cost was justified past times fundamentals, nebulous though they mightiness accept been, the parties involved seemed to completely abandon whatever illusions almost value together with made it a starkly momentum game. This was manifested inward the hiking of the offering cost to $ 38 on Th eve together with inward insiders inward the fellowship publicly bailing out at the offering price. Even the maddest of crowds, when constant confronted amongst proof that they are existence viewed equally suckers, volition wake up, together with to the dismay of the fellowship together with the banks, it happened an hr into the offering.
What now?
Much equally I would similar to believe that what has happened inward the final duet of days to Facebook stock is a vindication of valuation, I am a realist. There is no fury that matches that of a disillusioned crowd together with I believe that what you lot are seeing is momentum investors, who were promised quick riches if they bought Facebook stock, bailing out. Will they halt selling at fair value? Since they accept no thought what it is, why should they? If momentum shifts inward the past times are whatever indicator, you lot should run across the cost of Facebook drib non but to its intrinsic value (you accept mine, but yours may live on different), but to below that value. Since the fellowship is the poster-child for the “social media” sector, I mean value that you lot volition run across this momentum shift play out on other social media companies.
Would I purchase Facebook, Linkedin, Groupon or whatever other social media company? Social media is an umbrella nether which you lot accept various firms, approximately amongst to a greater extent than clearly defined concern models than others together with approximately amongst stronger barriers to entry than others, together with when momentum shifts, investors tend non live on discriminating. In the words of that eminent philosopher, Justin Bieber, you lot “never say never” together with approximately of these stocks are probable to live on bargains, sooner rather than later. If you lot are a value investor, you lot should live on ready.
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