Facebook shares fall 7% on Oculus deal

http://www.latimes.com/business/technology/la-fi-tn-facebook-shares-fall-on-oculus-deal-20140326,0,5772521.story#axzz2x6wLDZwD

by Varcht • 12 years ago

129 77 12 years ago

latimes.com

ChrisClark• 12 years ago

Pretty much because investors want a quick buck. They don't want to wait until Facebook owns the internet after mobile. That's way too far away and way too uncertain.

jfoster3• 12 years ago

I think it's a combination of factors.

I don't think many investors are familiar with Oculus VR. To them, facebook has just paid $2B for a company that hasn't released a product to consumers yet, and intends to make one of those headsets that were a big flop in the 1990s.

The other side of it (as you point out) is that institutional investors are generally not in it for long-term gains. If you manage a portfolio at an investment company, are hoping to get a nice bonus this year/quarter, hearing Mark Zuckerberg say he's bought a company that might take 5 - 10 years before it adds anything to Facebook is probably not very impressive.

notastartup2• 12 years ago

you are right but for value investors, I think that Oculus Rift could have a quite a big impact on the intrinsic value of Facebook, now the risk is, can they get it right? A non-gaming company getting into 3d virtual reality? Clearly, Google (actual experience of making hardware) doesn't think the timing is ripe yet.

What we have with Oculus Rift is that they were spooked by Sony, and decided to cash out while they still could.

VR will be a major major step for Sony if they get it right (which they are likely to do so) with PS4. They would absolutely own this space with their experience in 3d entertainment hardware.

simon_• 12 years ago

A decline in market value of more than $10B, implying that for the $2B FB spent, they will receive hugely negative value.

Seems extreme, although it was a bad day for tech stocks anyway, so the portion of the drop attributable to the acquisition is surely smaller.

Anyway, the market seems to be communicating that not only does it think FB got bad value, but that this deal is bayesian evidence that it is being badly managed.

EDIT: I still don't think 100% of the decline is attributable to the broader market move, because TWTR and certainly KING should be more volatile than FB. But, yeah, the story might not be as clear as I thought.

psbp2• 12 years ago

Maybe investors are mad about their shares being diluted through these stock deals?

tg3• 12 years ago

Rational investors don't sell shares punitively, although if they believe that they'll continue to be diluted at a rapid pace, that could account for some of the downward valuation.

tedsanders• 12 years ago

Rather than mad, perhaps the investors are taking it as a signal that Facebook management, by buying other companies in mostly stock deals, believes that Facebook stock is overvalued.

That could be a rational rather than irrational explanation.

suzerain• 12 years ago

I think you can attribute at least some of the decline to this. Only $400mm came from cash with additional shares possibly being issued based on performance. While this alone may not be a good reason for a long investor to drop shares, if it signals something about Zuckerberg's acquisition strategy going forward, then some investors may be expecting future dilution from new acquisitions. Furthermore, structure of share classes within FB also makes Zuckerberg's whims about this sort of strategy more influential to FB's direction than it would in another company.

harmegido• 12 years ago

I thought the article made a good point in that $2B wasn't perhaps what Occulus was worth, but how much it required in order to consider selling. FB had to pay a premium (perhaps because of its brand in the eyes of the owners of Occulus) in order to acquire the company, but it may be worth it to them anyways.

ryanatkn4• 12 years ago

A premium? Figures I saw were 10M units at $300. That's 0.666x projected sales, when 2-3x is the norm for mature companies.

outside1234• 12 years ago

Its $2B for the spend and $8B in information that Zuck might not know what he's doing.

ot• 12 years ago

Another factor that probably influenced (maybe even more than Oculus?) the decline is today's IPO of King.com, that lost 15% wrt. the initial price.

gfodor• 12 years ago

eh, TWTR dropped 7% too. wider market sold off.

jamesie2• 12 years ago

this is a poor headline. the latimes.com seems to imply causality between the two events when in fact, twitter fell 7% as well. So they could have written "Twitter falls 7% on Oculus deal"

lutorm• 12 years ago

Market news writers seem to always think they can attribute the market change to some event, even though they have no idea. This irks me to no end.

jimmytidey• 12 years ago

I guess you might have quite a short career as a market writer if you didn't want to link events to prices. You'd certainly write very short articles.

nroman• 12 years ago

In other financial news, Twitter shares fell 7.2% on the Oculus deal. Tesla lost 3.4% on the Oculus deal!

</sarcasm>

TrainedMonkey2• 12 years ago

It is possible investors are getting cautious seeing repeat of 1999 bull pattern.

joelrunyon• 12 years ago

Well less people will probably buy Tesla's now that they can try out their facebook friend's Teslas with their new Oculus' :)

</s>

pdknsk• 12 years ago

"Oculus" briefly spiked 14% today when NASDAQ opened.

https://www.google.com/finance?q=NASDAQ%3AOCLS

TrainedMonkey2• 12 years ago

Automated trading software perchance?

bsamuels• 12 years ago

Either that or day traders who have absolutely no idea what they're doing. Both are equally probable.

stygiansonic• 12 years ago

Similar to how TWTRQ spiked on Twitter's IPO...

digz• 12 years ago

I'm shocked that it didn't fall because of the Oculus deal, but look at twitter vs. fb in the last 48 hours... heavily covariant.

https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...

ceph_• 12 years ago

Looking at other tech stocks this seems like more of a broader downturn today. Twitter was down 7%, Zynga was down 4%, Amazon was down 3%. Correlation ≠ causation. I'm not buying the drop is from the Oculus buyout.

reqres• 12 years ago

I think you can get a rough sense of whether this is true by using Beta (http://en.wikipedia.org/wiki/Beta_(finance)) - Beta represents the riskiness of the stock relative to the market as a whole

After a quick google it seems Facebook's beta is ~2. So a NASDAQ fall of <3.5% is an indication that something other than a general downturn impacted Facebook's price

Please correct me if my understanding is wrong

hacknat• 12 years ago

It is, other stocks with low betas had a bad day as well. Some of it might be the Oculus, but most of it probably isn't

brisance• 12 years ago

The first paragraph is correct but the second is not quite right, and is a common misconception. Beta is a lagging indicator and by itself cannot explain a stock's movement or lack thereof.

There are much better guides to stock volatility such as the put-call ratio, implied volatility of options or general market volatility as measured by VIX.

fuddle• 12 years ago

The whole market is in a downward trend at the moment, its not just affecting Tech stocks.

jokoon• 12 years ago

damn I should invest what my gut opinions tell me

GazNewt• 12 years ago

Rubbish.

shittyanalogy• 12 years ago

You guys are falling for crappy financial news and are up-voting it out of personal opinion vindication.

badman_ting• 12 years ago

Yeah, stories like this are garbage. Nobody knows why day-to-day fluctuations in the market happen. (Mostly.)

pseut2• 12 years ago

A priori, sure. After the fact, if you have detailed enough data it can be pretty easy to identify the timing of certain events.

It doesn't mean that the reaction is correct or that it won't be undone in the future. But there's a huge difference between "day to day fluctuations are unpredictable" and "day to day fluctuations are inexplicable."

this_user• 12 years ago

Well, we had a couple of strong down days in the stock market over the last couple of days. Lots of momentum darlings like Netflix, Tesla, SolarCity, Pandora, Google, Twitter and Amazon took heavy hits. FB was already down 10% from its top in early March before today, so this was basically coincidence.

suyash• 12 years ago

It's about time someone comes with a new and better version of a social media website. Facebook is now a thing of the past.

melvinmt• 12 years ago

That's nothing, AWS prices fell 60% upon hearing this news.

brokentone2• 12 years ago

Apologies for not adding value, but, well played my friend.

sbashyal• 12 years ago

That's not right - AWS prices did not drop due to Oculus Rift news but the Google Cloud news:

http://www.forbes.com/sites/benkepes/2014/03/25/google-slash...

brokentone2• 12 years ago

You're missing the joke. He understands the two have no way to be causally connected, but drawing the connection is hilarious.

tvladeck• 12 years ago

Twitter shares also fell by over 7% and the NASDAQ by 1.43%.

Most likely this is not "on Oculus deal" (at least not solely) but for many reasons only Mr. Market knows.

notastartup2• 12 years ago

    But investors are clearly spooked by the latest pricey acquisition.

ugh. and 17 billion for whatsapp wasn't? I'm just puzzled at how irrational investor mentality is (herd). Oculus rift should've been a boost, it's far less riskier than whatsapp.

dragonwriter• 12 years ago

Financial reporting, where post hoc ergo propter hoc is often the limit of analysis...

ashray5• 12 years ago

I don't think people should attribute today's FB action to the Oculus acquisition or its price/terms. A slight negative chatter (Read: "Amateur CEO wasting money on useless toys") could easily make big momentum reversals, especially in case of a stock that mostly priced by sentiment versus intrinsic cash flows. Disclaimer: I'm by no means disparaging momentum strategies.

bobbles• 12 years ago

I was disappointed when I heard the acquisition news, but NOT because I thought it was a bad move by Facebook.

Buying companies like this will undoubtedly come back for them and help them be a dominant force.

The problem I have with this deal is that a vision of a geek oriented, gaming-first hardware-first company that had the support and faith of the community now WILL be influenced by the vision of a company that many people do not trust.

It's not a lack of trust in Facebook for the sake of it, but from many years of repeatedly abusing the trust of their user base.

pyrrhotech• 12 years ago

You have to beta-adjust this. FB is a highly volatile MOMO stock. The market was down a fair amount today. I am short FB but FB probably would have been down 3-4% anyway today, so maybe an extra 3% from this second terrible deal of 2014.

I was planning on covering around $50, but given the pattern of the terrible and immature management decisions lately combined with souring macro environment, I'm planning on riding this one down to the 20s

joezydeco2• 12 years ago

At lunchtime today I was listening to the "business hour" on the radio. Two analysts went back and forth about the deal, repeatedly calling Oculus "a company that makes virtual reality games". There has to be a certain % of Wall Street that has no idea what's going on at all.

WalterSear2• 12 years ago

I think this dip is a promising short term buy.

joezydeco2• 12 years ago

Or, as I saw someone else recently commented: "Facebook is shorting the hell out of their own stock"

WalterSear2• 12 years ago

So basically, no one likes this deal except Zuckerberg, Carmack and Luckey.

DigitalSea• 12 years ago

People are making a big deal out of nothing here. The bad publicity around the acquisition (if anything) caused the share price to drop, not investors misguided confidence in virtual reality tech. Lets not confuse the two. If people were applauding the acquisition, we would be reading an article on how the share price jumped 7%.

Fluctuations happen in the market every day tech stocks are particular delicate because it can be harder to predict what is going to happen. If you look around, you'll notice Amazon dropped 3%, Twitter also dropped 7% (amongst a few others also down).

We don't know for sure that the acquisition of Oculus even caused the drop. Although, looking back on previous FB acquisitions you see a drop of investor confidence as witnessed with the Whatsapp acquisition.

When Facebook announced the $19 billion purchase of Whatsapp their share price tumbled 4.8%, once again this was a short-lived drop once the fanfare died down. Facebook know what they are doing. The fact Sony are moving into the VR space and apparently Valve are also going to be getting in on it signals this isn't a fad, this is a new-found technology arms race.

He who has the most money wins and at the moment, Facebook have a bit of money and a good network of investors behind them to propel Oculus to the top of the VR market and inevitably beat competitors on not only features but the all important price factor.

Edit: I've been down-voted. I respect that, but if you're going to down-vote my argument at least have the audacity to counteract it in the form of a reply.

danieltillett3• 12 years ago

I think it is unfair that you have been down voted, but I think the reason is your statement that Facebook's management knows what they are doing. I don't know if they do, but the evidence so far at least looks questionable.

ceedan• 12 years ago

Value of Oculus Rift shares in Facebook just dropped $112M. Ouch.

bsder• 12 years ago

While the market, in general, is probably responsible for most of this, it is an interesting question as to what investors think about this.

All of the Facebook acquisitions seem to be defensive. Even Oculus is a defensive maneuver against Google Glass, and the fact that Google is unquestionably committed to marketing Glass (see the latest pairings to attempt to market it to upscale people).

I suspect that Facebook has no idea what to do with Oculus, but it doesn't want it in the hands of Google or Microsoft.

JumpCrisscross• 12 years ago

I am no Facebook bull. But the financial logic in this article is lacking.

Facebook fell 7% in trading today. The NASDAQ fell 1.4%. So we have 3 (β=3) to 4 points (β=2) of excess losses. The author argues Facebook dragged down the NASDAQ today. Let's suffer the assumption. Using the S&P 500's 0.7% fall we see 5 to 6 points of excess losses. On a day the NASDAQ 100 Volatility Index jumped over 1 point intraday to 18 [1]. I don't smell blood yet.

Macquarie sees “no near-term financial model that will drive the $2 billion valuation.” Cross-posted below is my back-of-a-napkin work from a prior comment [2]. Development kit sales are not a perfect predictor of consumer sales. That said, they provide a snapshot of present enthusiasm for Oculus. They are also useful for forming ballpark estimates.

Oculus VR says it has sold 75 000 "development kits" [1]. It has been 1 year and 7 months since August 2012 [2], when Oculus VR began selling its development kits. Let's assume a 200% YoY 2013 growth rate - that means 56 000 kits were sold in 2013. Let's say these keep selling at the $350 the Developer Kit 2 goes for [3]. That's $20 million in 2013 revenues. Let's turn that into $2 million of profits - a 10% margin.

Let's value Oculus VR as if it were a growing perpetuity. If Facebook had a cost of capital of {10%, 20%, 30%}, Oculus VR free cash flow (FCF) would have to grow at least {10%, 20%, 30%} a year. Otherwise, its $2 billion price tag would not make sense.

Companies are not immortal. Let's value Oculus VR as a 20-year growing annuity. Setting Facebook's cost of capital at {10%, 20%, 30%}, Oculus VR's FCF would have to grow at least {45%, 58%, 71%} a year.

Not a bad deal.

[1] https://www.cboe.com/micro/vxn/#historical

[2] https://news.ycombinator.com/item?id=7471826

InclinedPlane• 12 years ago

I think the biggest reason behind this is that the Oculus acquisition revealed how much of a credibility problem facebook has. And that reveals how weakly facebook's userbase is attached to them, and how easily it can go away.

Facebook shares fall 7% on Oculus deal

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