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Pakola. Green colored soda, made in Pakistan.

Pakola. Green colored soda, made in Pakistan.
Pakola. Green colored soda, made in Pakistan.

Facebook is going through a price correction

I wasn’t a fan of Facebook IPO, I mean, $38/share? It’s one thing to be hopeful and another to be an emotional fool.

Facebook earnings paranoia What you see now is a correction because everyone that could make money (bankers, lawyers etc) have been paid, let me add, handsomely.

Let’s be clear here, Facebook’s revenues grew 32%. That said, investors are not happy. Stock closed at $21.09 yesterday; 21% drop since July 27th, day after the earnings announcement. 45% drop since the IPO.

Facebook is not your conventional company. Its business model revolves around analyzing ginormous amounts of user data and then innovating mechanisms to monetize it. As of June 2012, it had 872 million active users, but not customers. Its customers are advertisers and we the users are the product being sold.

Facebook is a media network, similar to Google, not a social network. It happens to have a social component, that’s about it. It should be treated similar to any other media network dependent on advertising revenue.

That said, Facebook is worth $9/share as of this writing.

It’s very simple math.

Take yesterday’s closing price, $21 x shares outstanding of 2.74 Billion = $57 billion. But it is not worth $54 billion because it’s 2011 revenue was $3 billion. In tech industry, stocks trade at an average 8 times (conservative) the revenue. Revenue times 8 gives us $24 Billion. That means the market price of its stock should reflect that reality but it doesn’t because if it did, the stock would trade at $9 ($24 Billion/2.74 Billion shares outstanding).

That doesn’t mean Facebook is a dud, it’s not, just overvalued.

Here’s some radical advice for Facebook.

Take the company private, charge 99 cents for monthly access, keep the ads on free accounts, and concentrate on retaining top talent.

Some provisions in JOBS Act are bothersome

Jumpstart Our Business Startups Act or JOBS Act recently passed the House then Senate and is now in the House for the final passage. It has bipartisan backing, President Obama supports and Silicon Valley is all for it. That’s all good but from an investor point of view, it’s the worst thing since the repeal of Glass–Steagall Act of 1933.

Tech pundits and those who cover the industry have promoted JOBS Act as a “crowdfunding” bill that will allow any self proclaimed entrepreneur to raise money through social media. Something similar to Kickstarter for an average Joe to join in the social media gold rush by investing in everything from apps to flying skate boards.

That’s not a bad thing, it will spur innovation. But, at what cost? Less transparency, gradual deregulation and little accountability. Why do we have such a short term memory? In 2008 we saw what happens if any part of an industry, especially one that involves financial markets, is deregulated.

Here’s what bothers me:

Increase in number of shareholders

Before, a company had to go public if it reached 500 shareholders and assets worth $10 Million. This law is primarily responsible for Facebook’s impending IPO as it reached the 500 shareholders mark. The bill relaxes the requirement by increasing the number of shareholders to 2000.

Clearly, 500 is high enough number of shareholders for a company to start opening up its books for investor scrutiny. Increasing the number to 2000 will delay the scrutiny thereby allowing startups that are in red to continue operations in red because of outwardly impression of the next big thing.

Sarbanes-Oxley

The bill adds an “emerging growth companies” category relieving startups from certain regulatory and disclosure requirements when SEC registration statement is filed to go public. IPOs have 2-year phase-in period to comply with Sarbanes-Oxley Act, the result of Enron debacle, but the provision in the JOBS Act will extend the period to 5 years.

I agree that there are compliance costs associated with Sarbanes-Oxley Act but there was a reason the Act was put into place. We had a disaster that gulped Arthur Anderson and Enron. Since the Act being the law, we haven’t had a single accounting scandal that could devastate markets. Relaxing a requirement proven to have succeeded in its goal of resisting fraud is a step in the wrong direction.

Last word.

According to Ryan Caldbeck, who penned an article on TechCrunch recently supporting the JOBS Act, “startup investing is reserved for the 1%” but it doesn’t need to be that way. Sorry, but that’s exactly how it is suppose to be. These are some really rich 1 precenters who can take the risk and have the experience.

The argument Caldbeck uses to persuade his readers that JOBS Act is a good thing is the same argument used by lawmakers who wanted everyone under the sun to get a mortgage. It was a slap in the face to everyone who worked hard, saved for that down payment and maintained good credit. History is repeating itself again, and this time, it’s not the housing market.

Irony is, accredited investors and VCs will be the biggest losers of this bill, even though almost all of them are die hard fans of the bill.

One more thing.

Attn Scientists: You have 3 years

Further reading:

Silicon Valley taken for a ride by JOBS Act

Small Business Bill Would Weaken Audit Protections

Soon Even Your Mom Can Invest: Senate Passes Crowdfunding Bill 73-26

Golden gate bridge

Golden gate bridge
Golden gate bridge

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A little Pinterest humor to brighten up your Friday; courtesy of good folks at The Joy of Tech.

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