Incredibly, Facebook Actually Thought “Greed is Good” Still Applies
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Even before the recent announcement of the lawsuits aimed Facebook’s (NASDAQ: FB) way as a result of the botched IPO, the happenings a week or two before the company went public should have been enough to keep investors on the sidelines – at least for a while.
The “news” that Facebook is facing earnings pressure as more and more people log on using their mobile devices vs. that old-school PC thing is nothing new. The problem was evident months ago when Facebook first intimated an IPO was forthcoming. One of the shareholder lawsuits addresses this concern. To be fair the problem – according to the disgruntled investors – isn’t necessarily the mobile device shortcoming, it’s that only a select few were alerted to the lowering of 2012 revenue forecasts as a result. Now that's not right at all, but the overriding problem was there for all to see.
The lack of a mobile application solution should have been common knowledge for anyone and everyone who considered investing in what was going to be an overvalued IPO – period. The change in revenue forecasts? Yeah, everyone should have been privy to that information of course, but there were several indications something was amiss before Facebook went public – even before the vaunted Roadshow to end all Roadshows.
NASDAQ isn’t immune either. The system glitches unnerved investors and traders alike as they impatiently waited first for the trading to actually begin, then for confirmations to come through – oops. What impact this had on actual losses remains to be seen, but it certainly left egg on the face of NASDAQ executives – especially as they won the war with the NYSE for the right to list Facebook shares to begin with.
The Writing on the Wall
Irrespective of the lawsuits and negative press we all know the problems Facebook has in front of them – a saturated North American market, not enough diversification in revenue sources and the aforementioned (and by far the biggest) problems generating revenue with mobile devices. With only four people left on the planet without a smartphone - and they're somewhere in the Amazon and can't get decent reception even with a 4G LTE network - this is a huge gap. These were all concerns long before the IPO, but of course it wasn’t going to matter it's Facebook.
The real problem was the “greed is good mentality” leading up to – and including – the Roadshow. Facebook management – particularly CFO David Ebersman – continued pushing for a higher and higher initial offering price which set the tone for what was destined to be a disappointment.
For veteran investors this is nothing new – IPO’s are, in large part, driven by momentum. If the company kicks off trading significantly above the initial price more and more investors will jump on board. It makes one wonder what would have happened had the company stuck with the earlier target price of $30 or $32 a share – instead of the CFO jacking it up about 25% to $38. Consider the mood of shareholders and the marketplace in general today had that been the case. The stock would likely be trading in the $35 range and widely viewed as at least a minor success – even with revenue generation and other concerns.
Instead Zuckerberg, Ebersman and crew got greedy – really greedy. Is it a coincidence the IPO valued the company at just over $100 billion? Sort of has a ring to it, don’t you think? Hmmm.
As noted in recent articles there are better options out there for those interested in the social networking and/or online space. Groupon’s (NASDAQ: GRPN) recently released Q1 results had most everyone forgetting all about that little “accounting thing” that caused so much consternation recently.
And though these two took a while to embrace, LinkedIn (NYSE: LNKD) is another, better option than Facebook right now and a more defined growth path in front of them – and the results to prove it. AOL (NYSE: AOL) is doing a real nice job of slowly but surely re-inventing themselves from the dial-up internet access provider for non-techies (remember when?) to an internet content providing machine. A tad expensive yes, but at only 32 times future earnings – about a 1/3 of where the company stands today – AOL is on a fast track in the right direction.
As for Facebook here’s a newsflash - It’s 2012 not 1987 and – greed is NOT good.
timbrugger has no positions in the stocks mentioned above. The Motley Fool owns shares of LinkedIn. Motley Fool newsletter services recommend LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.