Facebook fought SEC to keep Mobile risks hidden before IPO

http://www.bloomberg.com/news/2012-10-10/facebook-fought-sec-to-keep-mobile-risks-hidden-before-ipo-crash.html

by ahsanhilal • 14 years ago

94 43 14 years ago

Aloha• 14 years ago

I found the initial valuation questionable to start out with.

But its clear to me, Zuckerberg is more interested in long term growth of his company than he is any short term profitability goals. I think Facebook may well be a great stock to hold over decades - but not for months or weeks, as the current market seems to think in.

jacquesm• 14 years ago

> I think Facebook may well be a great stock to hold over decades - but not for months or weeks, as the current market seems to think in.

Lots of people think it is a great stock to hold on for minutes, just long enough to sell it to someone else after borrowing it.

htmltablesrules• 14 years ago

I wouldn't want to hold any Internet-based stocks for "decades". I believe the life span of any public company to be 25 years or less, with Internet service companies being significantly less.

czr80• 14 years ago

25 years? That's a little short...

Semi-relevant link I happened to come across recently: http://marginalrevolution.com/wp-content/uploads/2012/09/big...

Swizec2• 14 years ago

25 years? Aren't there public companies still very alive and kicking that were founded before ww2? Whose stock is still pretty valuable?

Boeing comes to mind. BMW as well. General Electric maybe. Actually plenty of things in the hardware space.

modarts• 14 years ago

Facebook will not be around for decades.

robryan• 14 years ago

Will not be a market leader of flat out not around? I would expect MySpace to be around in some form for a long time to come.

kahawe2• 14 years ago

> Zuckerberg is more interested in long term growth

If anything, for all fb employees including Zuck this was the big cash-out because they and their very close "partners in crime" were the only ones who really made any money from all this; for them it was pretty much money out of thin air and for the average investor, well it turned out to be the other way around.

asadotzler• 14 years ago

Why they chose to quote two random individual investors, I cannot say. What did they add to the story?

andrewljohnson• 14 years ago

Man on the street quotes give readers a personal connection to the story.

It's similar to the fact that if you tell someone a hundred people were killed in a bomb blast, they will brush it off. But if you describe the tragedy of a single victim, they will be crushed with feeling.

Cbasedlifeform• 14 years ago

What investors didn’t see until a month after the IPO were the letters that pushed Facebook to disclose in detail such key financial challenges as decelerating revenue growth, user count and its dependence on gaming company Zynga Inc. (ZNGA) -- all issues that arose in prominence after it became a public company.

Publishing the SEC letters beforehand would be “a better way to get the information to the market than an amended filing,” said Peter Henning, a former SEC lawyer who teaches at Wayne State University in Detroit. “The SEC is a better soap box than the filings.”

Christ, that sounds like a PR disaster if not the stuff of more class action suits.

drusenko2• 14 years ago

I guess you missed the next part:

Current SEC policy is to release correspondence no earlier than 20 business days after the IPO. The SEC doesn’t post correspondence “real time,” said John Nester, a spokesman, because “people could misinterpret our questions to companies about their disclosure before companies have had opportunities to provide a complete picture.” By law, “a company is responsible for its own disclosures,” he said.

The rules are the same for everyone... But only scrutinized when a company does poorly.

trhtrsh3• 14 years ago

ZNGA IPO'd last year, and laid bare their entanglement with FB. How could anyone not figure out that the entanglement applied to FB as well?

aaronbrethorst2• 14 years ago

    Ryan Cefalu, a 34-year-old data-systems manager and
    father of two in Baton Rouge, Louisiana, said he
    bought about $4,000, or about a month’s salary,
    in Facebook stock and has lost about $2,050 on paper.

    “The IPO went terribly,” he said. “I expected it to go
    up for a couple days at least before it went it down.
    That never happened. It never had a chance to.”

I have zero sympathy for him. His investment strategy appears to have been "find a bigger sucker" and, unfortunately for him, he turned out to be the bigger sucker.

I'm a shareholder in FB, and have lost about 18% of the money I've put in, but I always expected it to go down for a while[1]. I actually never intended to invest until the first lockup period expired, but I got edgy when they finally started revealing their Adsense-esque ad strategy. As it works out, I'm actually at breakeven on the money invested after the first lockup expired. I figure that, within a couple years, my wild and crazy 'buy and hold' strategy is going to look pretty smart.

Then again, I could always turn out to be the bigger sucker ;-)

[1] Of course, my first tranche is down 40%, but I'm actually making it up on volume :P

X-Istence• 14 years ago

I'm 63.77% down. Then again, my four shares really don't count ;-).

I'm keeping them, hopefully in a year or two they are back to break even, maybe not. I don't care. I "play" the stock market for the fun of it. I certainly didn't expect it to tank nearly as much as it has done so far though.

hpvic03• 14 years ago

I have a hard time understanding why people bought FB IPO stock. The P/E ratio was around 100 when it went public, and their main revenue source didn't seem to be growing fast enough to justify this.

I know hindsight is 20/20, but I'm genuinely curious: why did people think this was a good deal? (Aside from the fact that it might have popped a lot more on opening day due to general public interest.)

dspillett• 14 years ago

> I have zero sympathy for him. His investment strategy appears to have been "find a bigger sucker" and, unfortunately for him, he turned out to be the bigger sucker.

While I have no sympathy for him specifically, if a significant risk was deliberately kept from potential investors then I'd support investors more generally (I'm sure there were many who had less silly investment plans, who were genuinely investing in a company to see it and their investment grow long term) if they demanded an investigation into why this did end up staying hidden until after the IPO.

If fb fought to keep the information hidden, the situation can't as easily be filed under "it is the investor's problem that they didn't ask/research" as many stock market moans can be.

drusenko2• 14 years ago

The SEC's role is to play devil's advocate. You would think it obvious that FB would fight against that.

To me this article screams: "Waaah, I lost money on FB. Yes, they disclosed all of their risks ahead of time, but I would rather they would have predicted the future so I could go back and not invest".

If you think investing in hype is guaranteed money, you deserve what you get.

aaronbrethorst2• 14 years ago

That's an excellent point.

joering2• 14 years ago

I have no sympathy for you either. What you doing is not investing in stocks based on rational decisions that are based on financial statements; you are simply using stock market as a gambling machine. Like a gambler who lost $10k but now is back with another $5k and is "winning back" his lost. But its only temporarily. Noone in his sound mind would invest into Facebook at such a P/E [1]. Yes the stock was up for couple days but its back to south and never broke is downtrend. See you at $8, together with Zynga from $14 to $.40. What are going to do then?? Buy more just to try to "win back"?

And also, can you define "expected to go down for a while". I think you rather meant that you expected this stock to lose a little bit of value [after you bought], but is it still in your stop-loss scenario (never heard any reasonable investor with 18% down stop loss).

[1] And please, lets stop comparing it to Amazon P/E. Why would you compare a company that makes tons of money for years based on the principle that humans need to buy products, with a temporary-trend where company makes money on annyoing ads that nobody wants or likes?

cletus• 14 years ago

The "average Joe investor" stories seem weirdly out of place, particularly for a Bloomberg piece. I guess it's a shallow attempt to engender sympathy, which is odd because I have precisely zero sympathy for either of them.

Lots of people (myself included) had been saying that Facebook was overvalued pre-IPO. I don't say this as any testament to any investment acumen I purport to possess (on the contrary, I largely suck at particularly short term share trading). What I do mean is that as an outsider with some cursory research and common sense, this was entirely predictable.

The only unknown with the IPO was how irrational the market would be and I'm glad to see it wasn't.

The people who say "look at the eyeballs they have; the sky is the limit" are the last people you should take investment advice from. Facebook had (and has) two primary sources of revenue: advertising and virtual goods. Valued against similar companies it was overvalued. And still is (IMHO).

I think this piece overstates that Facebook was attempting to hide things here. It's natural that any IPO will try to disclose as little as possible and try to be as positive as possible while stil being truthful and accurate.

Personally I may think of buying in if its gets down to $10-12.

Even so, Facebook is an extremely risky investment. Instagram is a cautionary tale here: from nothing to existential threat that you need to buy-to-shelve for $1 billion in two years... well, I guess it doesn't take much to threaten Facebook.

aleemb• 14 years ago

> Lots of people (myself included) had been saying that Facebook was overvalued pre-IPO.

You could have shorted the stock or traded options.

There was a fair bit of uncertainty because the average Joe, his family and friends all used FB. Many investors feared that the stock would be driven by sentiment rather than rationality. If the stock went to 50, it would not have surprised me.

Like you I didn't support the high IPO valuations either but I still would love to own the stock with minimal downside risk. As would a lot of other people out there. FB has a lot of appeal.

At $10 the company will have a market cap of about $20 billion, which is pretty low for a company with a billion monthly active users. If you discount that, you are probably discounting the bigger picture.

At some point Apple had tremendous unrealized potential. The idea that it could get into phones and do really well wasn't hard to digest. On the contrary, it seemed like an obvious move.

FB has similar unrealized revenue potential. It could start charging $X per month to businesses with > Y fans. It could offer premium dashboards + analytics or similar features. There is no shame in premium, I am not sure why they only do advertising and commissions but my sense is that currently they are focused on growth and building a moat around their business.

I don't own the stock and I don't care if it goes up or down but your post seems be discounting the company's potential.

wtvanhest• 14 years ago

Its really difficult, if not impossible to short stocks after IPOs and completely impossible to have shorted at the exact IPO price arranged prior to the IPO. This is a brief article on why:

http://www.investopedia.com/ask/answers/05/062905.asp#axzz28...

It is also not possible to buy put options prior to the IPO as there are some guidelines that must be met prior to being able to buy puts. On Facebook specifically, they were not offered for almost 10 days after the IPO:

http://www.ise.com/assets/documents/AboutISE/PressRelease/Co...

nkoren• 14 years ago

At $10-$12, that's effectively saying that the company has the potential to grow its profits by a factor of three or four. Then it would have an industry-standard P/E ratio, roughly on par with Apple's. This sounds about right to me.

If you were to actually discount the company's future potential, then an industry-standard P/E ratio would put it at $3-$4.

[Edit: I'm not a trader, but if I were, I'd be shorting down to about $18, and buying at $9.]

palebluedot• 14 years ago

> Lots of people (myself included) had been saying that Facebook was overvalued pre-IPO.

You could have shorted the stock or traded options.

Before you short any stock, it is wise to keep in mind the maxim "Markets can remain irrational a lot longer than you and I can remain solvent". This isn't really a problem on the long side (sans margin), but is a real problem on the short side.

thematt• 14 years ago

At $10 the company will have a market cap of about $20 billion, which is pretty low for a company with a billion monthly active users

I think you're making the mistake of backing into the valuation based on an arbitrary statistic they tell you is important. Who cares how many monthly active users they have if they can't make any money off of them. They could have six billion people using their service, but if they can't generate revenue from them I wouldn't pay $5 for the stock, regardless of how much potential they claim they have.

If all those users have the potential to generate massive revenue, fine... then prove it. Then maybe I'll buy the stock, but in the meantime here's no reason to rush in based on promises and "potential".

nzealand• 14 years ago

I forget where I first read that $12 was fair market value, but I will be more than happy to buy in at that price. I doubt they will break below $10.

trhtrsh3• 14 years ago

Instgram was $300M + 22M * FB, so only ~$700M today, $550M at your valuation.

squid_ca• 14 years ago

I am not an investor, financier, etc, so this will be a horribly naive question. Please bear with me.

From the comments regarding FB's IPO on HN in general, I am under the impression that the point of an IPO is to gain the company as much money as possible, and that in this regard, Facebook's IPO was a resounding success.

From the point of view of an investor, though, the IPO was a huge failure. Knowing, then, that any company approaching an IPO is trying to get as much money as possible from its initial investors, why would anyone want to be one? Is it solely because they are hoping that the company will be wrong about its own potential measure of success? Or was the Facebook IPO somehow different than an "average" one?

runako• 14 years ago

>> Facebook's IPO was a resounding success.

That's correct. The CFO who led this should get a huge bonus. As Mark Cuban said: if the CFO said he was able to raise $10B in an IPO and then decided not to in order to protect investors, he should be fired. (That's a rough paraphrase.)

>> why would anyone want to be one?

Because if you can get in pre-IPO you usually do quite well selling to the suckers at the open. But the suckers don't realize that the key point is "pre-". A few might remember the glorious IPOs of the 90s that seemed to rocket up every day, and hope this will happen to every Internet IPO.

eyeface• 14 years ago

Similarly naive answer: I'd imagine that the benefits of having a massive IPO and then having your stock tank are substantially less than having an increase in your stock value over time, as a company.

trhtrsh3• 14 years ago

FB rode a bubble. An IPO is supposed be some mix of (a) like a giant VC round, with various institutional investors instead of VCs. The idea is that the company needs the money to fund growth. and (b) a chance for early shareholders to cash out, more easily than via private stock sales.

The awkward part is that (a) and (b) tend to contradict each other -- why would you sell your share if the company is growing? (good answer: you need to sell a bit to buy a house. bad answer: you think the company has no upside potential)

If Facebook chose to go public 2 years ago at $20/share, it may well have seen the same hype-driven runup. Or maybe the pre-IPO pre-SEC private market auctions fed a 2-year bubble driving the stock up to ~35 based on wishful thinking and non-SEC-approved financial speculation, and the IPO was the cresting wave that took the stock close to 40 just as the wave broke and reality set in.

tokenadult• 14 years ago

The IPO has done a lot to convince me that Facebook is a fundamentally slimy company. Regular day-by-day use of Facebook convinces a lot of my friends of the same thing. So why are we using Facebook day by day? Because we think we can catch up with one another's news and have interesting discussions on topics we all enjoy at the expense of Facebook's investors.

This has been done before. A lot of my friends used to hold their noses and gripe about AOL, but use it daily. AOL was founded in the 1980s, so it has reached the twenty-five-year age referred to in another comment in this thread. AOL is still in business, amazingly, although it is now far from being the dominant company in online interaction (that would be Facebook, these days). I've said it before, and I'll say it again: "Facebook will go the way of AOL, still being a factor in the industry years from now, but also serving as an example of a company that could never monetize up to the level of the hype surrounding it." I could be wrong, but that's my sense of where Facebook is in the market.

anigbrowl2• 14 years ago

Agreed about AOL, and I'd cite Compuserve as an additional example. Fundamentally, I feel these companies are the online equivalent of shopping malls - consistent, curated, and safe. They even have the same sort of controversies: controversial photos of breastfeeding Moms on Facebook don't seem all that different from kerfuffles over breastfeeding in a mall food court. In pg-speak, facebook would be more of a cathedral than a bazaar, but I'm not quite ready to equate shopping with religion :-)

I don't think there's anything wrong with this; I'm not a shopping mall type consumer, but I enjoy wandering one now and again and can see the attraction. From an investment standpoint, it strikes me that the value of brick-and-mortar shopping malls is very much a function of the diversity and quality of the tenants they can attract, making Zynga the equivalent of the 1980s amusement arcade.

pnathan• 14 years ago

P/E of 100, stock dived. This should not surprise anyone.

Oracle has 15 P/E, so does Apple. Exxon has around 9 P/E.

For perspective; Amazon has 300 P/E, LinkedIn has 900ish.

With a bit of looking at investing information, you can get a rough sense of what's crazy to invest in for a individual investor looking at a < 1 year horizon. FB sure qualified IMO.

Facebook fought SEC to keep Mobile risks hidden before IPO

Related Stories