New Social Networks are all the IPO rage in the US now.
In the valley that’s all they talk about.
And here comes Facebook at the heels of the movie moxie to steal the thunder of the tech markets, now that they were on the road to repairing themselves.
I have a word of caution to all of you eager beavers out there…
If all those friends, you are sporting on your FB page are real — then I have a got a good tech stock to sell to you. One especially designed, for your retirement account.
Never mind the company is valued by the Goldman’s chickenhawks at upwards of 50 Billion dollars.
Never mind they don’t share their financials with the world…
You just buy it for the children’s education… [and I don't mean Zuckerberg's education here]
And then come back to me or GS because we have some shares of the Brooklyn Bridge to unload too.
With Goldman’s sizing up the world’s demand for Facebook and undercutting the American market it is wise to look twise and see what people are thinking when they value the stars and the sky for the flimsy shares of a glorified E-tailer of associated wen adverts…
And then in the foot of the hype here comes Linked in and it is here that the valuation seems out of touch with reality too.
More than 3 Billion US dollars?
Bite me…
But maybe they are right and not wrong in valuing thus the errant stocks…
After all, who on earth knows what forecasts to make?
Private secondary markets supposedly value LinkedIn at $2.5bn-$3bn.
And the Russian second hand demand for FB shares values them to the tune of 50 Billion US dollars…
Still we know nothing transparent about Facebook’s books…
Because the people of Facebook who want you to reveal the size of your underwear to the world’s peeps, they don’t trust us enough to show us their balance sheets…
So we go back to LinkedIn where the information exists and we can extrapolate from them what holds true for Facebook too.
But to arrive at just at the bottom end of the LinkedIn range of valuations, it requires sales to expand 50% each year, over the next three years, before tailing off to a lower 10% and then going to a terminal growth rate of 3 – 5 % in 2019.
And that old nemesis of the Dot-Com Bombs, EBITDA as a proportion of revenues has to double to 20 per cent and stay there. What is more, the elevated current high level of investment (a quarter of all sales) has to fall sharply and quickly.
None of these things are possible really to happen in this exact scenario.
Unless our friend Reed writes his own scenario with God and the markets.
The case for FB is even more complex as Goldmans is cagey about releasing any of the financial results data, since they are focused on just the foreign market. Therefore very limited requirements for disclosure and they are just focused on selling ”unknowns” to the world’s pent up demand for the frivolous and a good place to put easily gotten gains…
Anyone remembers what happened last time Goldmans was selling naked default swaps of the subprime instruments and collateralized debt black box debentures?
Right on… Easy come easy go.
But there is demand out there and the Goldmans boys will find a way to fill it.
Russian oligarch money anyone?
Deposed Dictator’s flush cash for FB and GS washing?
All those above, are the likely candidates to take the large positions like the earlier Russian investors of Facebook.
But what have the investors learned fro the near past of the 1999 – 2000 scorched earth?
As the latest Social Networks Facebook, and LinkedIn, prepare to go public, almost everyone seems to believe the hype. That Facebook is worth $50bn and LinkedIn is worth $3bn, is recounted as fact.
Anyone out there remembers Friendster?
Beebo?
Hi-5?
MySpace?
Orkut?
Yoghurt?
Yes the eating kind is more valuable than Friendster…
Mebo anybody?
Still it’s true that some social networks actually make a profit. Yet not this lot…
And even then, there are still precious few numbers to analyse and business models are no more proven than they were for the imwardly exploding dotcoms of a decade ago.
The dotcoms implosions can surely be repeated and to just illustrate how ridiculous it is to even try to value these things; we consider Facebook’s smart move to not sell it’s stock to the US investors.
Maybe because they simply couldn’t handle nor could they stand up to the serious scrutiny by the US financial regulator and the SEC.
Or maybe Goldmans had a sure thing with the Russians…
At any rate we only have LinkedIn with real figures to examine.
LinkedIn whose S-1 registration statement as submitted to the US regulators, provides some rudimentary financial statements from which to model the company.
Now Facebook didn’t provide even those to the US.
Why?
Something to hide in there Mr Zuckerberg and Mr Blanckfein?
No patience for the rudimentary requirements of the SEC for each and every one of the start ups that choose to IPO?
Or are the Russian Oligarchs willing to take the whole subscription to park their money safe in this age of sudden changes out of favour and of Status Quo?
Whatever it is smells fishy.
Still for LinkedIn, the revenues, operating costs, capital expenditure and depreciation and amortization schedules are available for the past five years.
And for that we are thankful.
Because it is then a simple step forth to forecast earnings before interest, tax, depreciation and amortization and, thus figure out the future cash flows.
On another ”unrelated” news, FarmVille maker Zynga was valued at $7 Billion US…
Also heading for a cash infusion of $250 Million to ”justify” this valuation and an upcoming IPO after just three years spent selling virtual objects [that do not exist] on the FB platform.
The real problem with stratospheric valuations is that the tech sector as a whole will have to face another bloodletting if one of these companies blows…
And very much like back in 2000 all the well run reasonable service orientated companies, that had real cash flows, tanked along with the Infospace, Dogpile.com and Bratopia.com and all other toxic bombs.
All these three stories though, have some things in common. First, they all send the same loud and unmistakable message that there is BIG and EASY money to be made by investing in Silicon Valley companies. Second, they all appear in the Wall Street Journal, the newspaper of record for investors, bankers and venture capitalists. And third, is that they’re all highly speculative stocks. Not for the faint of heart. Not for conservative value investors but only for those who drink plenty of their own Cool-Aid…
So suck it up because as you can guess it’s coming.
You see, the incoming red tide poisons every body’s food.
Does Goldman and the host of self serving VCs and assorted Investment banker/wankers operating these rushers only manage to usher another era of exuberant optimism over these starry eyed dream valuations?
And the resultant toxic bombs?
Because really now – these debutantes have no clothes.
Really – am afraid so…
Yours,
Pano
PS:
We need to deflate this coming bubble before too long.
Because we may be heading into another serious dot-com bubble.
It’s even possible that we are already inside one.
The news we see each day suggests that all the right elements for a bubble blow are in place…
Young companies that are valued much higher than their cash flow or real profits would suggest…
Conservative investors looking to pump money into a growing market for easy returns in these young upstarts.
And as we start to talk more about a new raft of IPOs and stock market flotations, the bubble will move from professional investors towards the public markets, and will end up in the retail Mom and Pop saver portfolios, where it can have really disastrous consequences.
But it doesn’t have to happen this way.
Because bubbles are not inevitable. And Greenspan isn’t around anymore… Nor is Ayn Rand and her Atlas mugged…
So when you see information about greatly exaggerated valuations, future investments and rumored deals – please – remain skeptical.
Stay Cynical.
Remember the mantra and practice it often as a talisman against greedy unscrupulous stock hawkers.
Money talks – Bullshit walks.
Cash Money that is…
Because Cash Flow is the only key indicator we should believe here…
Get the future cash flows aligned right and we got the beginnings of a valuation tool.
A sure footed instrument.
Discount these cash flows the easy way, because there is no debt, and you’ve got a reasonable valuation…
But are the Wall Street chickenhawks willing to use this old fashion economics valuations?
Oh No.
Never in this Life time…
Not if they can help hide it behind exotic valuation techniques and financial black box wizardry designed to fool the Fools lining up to execute the orders.
Or to be executed…
Remains to be seen.
