Showing posts with label IPO. Show all posts
Showing posts with label IPO. Show all posts
Sunday, May 26, 2019
Do the Unicorns Signal a Market Peak?
Unicorns in the financial markets bear scant resemblance to the gentle creatures of mythology. Companies with private valuations of $1 billion or more, called "unicorns" by investors, have been going public recently after many years of incubation by private funding. The results haven't been pretty. Two of the largest--Lyft and Uber--have lost value. Snap, another large company that went public a couple of years ago, has also lost value. The sagging values of these high profile companies raise a question whether investor confidence is receding and the market is potentially headed for a downturn.
Much of the reason for the price drops is attributed to the long incubation periods for these companies, during which their values rose into the billions. Whereas 20 or 25 years ago, companies might go public after having achieved valuations of a few tens of millions, unicorns have provided enormous returns to venture capitalists, early employees and other private investors before the retail schlemiel is given a chance to lose his money. In other words, the upside pop that often accompanied ipo's in the past has already been pocketed by the smart money. What remains for Ma and Pa trying put a little money into their IRAs is the uncertainty of companies that have yet to consistently turn a profit.
A hot ipo market fuels overall stock values. Look at the 1990's, when ipo enthusiasm grew so vast that things got out of hand and the 2000-01 downturn took some 70% off the value of the Nasdaq index. The recent unicorn fails will dampen further ipo activity. The smart money was too clever by half in using ipo's as a way to vividly demonstrate to retail investors that they are but a septic system for the rich and well-connected. As President Trump's trade wars continue, the chances for a no-deal Brexit increase, and investor enthusiasm wane, the chances for a significant market downturn rise. The unicorn ipos may signal a peak in stock prices. Embrace cash. In uncertain times, it's worth its weight in gold.
Sunday, May 20, 2012
Winners and Losers in the Facebook IPO
WINNERS
Billionaires and Millionaires. Some Facebook investors and employees had a very good day. A few of them became billionaires and quite a few became millionaires.
Facebook. The fact that there wasn't much of a pop in the stock after trading began means that Facebook left little money on the table when it priced the offering at $38 per share.
Selling shareholders. More than half the stock offered was sold by investors and employees who had gotten their stock privately before the IPO. The lack of a big pop means they, too, left little money on the table when they sold.
California. The State of California stands to collect something like $2 billion in taxes from sales of Facebook stock by state residents. With the state's finances in the fiscal ICU, that's like manna from heaven.
Short sellers. The fact that the stock closed barely above the offering price indicates that many shareholders are looking at Facebook as a short term play. Like wolves scanning a herd of caribou for any animal displaying signs of weakness, short sellers are always on the alert for flagging shareholder interest. They may find a juicy target in Facebook.
LOSERS
Nasdaq. The opening of trading in Facebook was delayed for "technical" reasons that are now being poked into by the SEC. Press reports indicate that order execution for many investors was sloppy and slow. Not the kind of publicity Nasdaq needed from the highest profile IPO of the year.
Morgan Stanley. MSCO got the highly coveted lead underwriter position. Then it had to earn its fee when the stock began threatening to drop below the $38 IPO price. MSCO may have bought a shipload of stock toward the end of Friday, when trading opened, in order to keep the price above $38. Tomorrow, the second trading day for Facebook, could bring more challenges.
Money managers. Mutual fund managers and other money managers like IPOs with big opening day pops. They use their market connections to score a big allotment of the IPO, and sell some of it into the pop, getting a fast buck that's needed. Most money managers don't match the S&P 500, and non-typical gains like IPO pops are important to help them stand out from the crowd. Facebook wasn't a good IPO for them.
Tech companies planning IPOs. The tepid Facebook pop may put a damper on IPOs planned by other tech companies. The "technical" problems encountered by Nasdaq, market of choice for tech companies, won't add to anyone's enthusiasm. If investors don't have a good time with a high profile IPO like Facebook, they'll be wary of other, less glamorous ones.
Mark Zuckerberg. Billionaire, just married, he's got to feel like he's at the top of the world. The market will disabuse him of that notion in a couple of trading days, at most. He'll learn that public company stocks are traded short term, which means that he's expected to deliver, every quarter on the quarter end. Whatever his long term goals for the company, the short term performance will have to be gorgeous, and then more gorgeous the next quarter, or the stock price will be hung, drawn and quartered (pun intended). It gets personal, too. One lousy press release from the company, and bad things will be done to his effigy. He'll be made to understand, not in a fun way, that short sellers will be a permanent presence in his life, trying to financially actualize schadenfreude. Sooner or later, one or more of Facebook's officers, directors and employees will leak inside information to family and/or friends, and embarrass the company when federal authorities swoop in. He'll feel betrayed, but he won't be able to prevent it. He'll feel every uptick and downtick of the stock's price, because shareholders will make sure he feels ticks. Any significant failings by the company will lead to his introduction to the most prominent class action plaintiffs lawyers in America. As SEC rules compel him to make disclosures about his compensation, perks, transactions with the company, holdings of company stock and a variety of other things, he might end up feeling like he has less privacy than the most effusive of Facebook users. Surely, Zuckerberg has already been counseled by his advisers about all of the foregoing. But the reality of his new life running a public company won't sink in until he lives the full, graphic experience. There's a price to pay for going public, and the bill collectors are gathering.
Billionaires and Millionaires. Some Facebook investors and employees had a very good day. A few of them became billionaires and quite a few became millionaires.
Facebook. The fact that there wasn't much of a pop in the stock after trading began means that Facebook left little money on the table when it priced the offering at $38 per share.
Selling shareholders. More than half the stock offered was sold by investors and employees who had gotten their stock privately before the IPO. The lack of a big pop means they, too, left little money on the table when they sold.
California. The State of California stands to collect something like $2 billion in taxes from sales of Facebook stock by state residents. With the state's finances in the fiscal ICU, that's like manna from heaven.
Short sellers. The fact that the stock closed barely above the offering price indicates that many shareholders are looking at Facebook as a short term play. Like wolves scanning a herd of caribou for any animal displaying signs of weakness, short sellers are always on the alert for flagging shareholder interest. They may find a juicy target in Facebook.
LOSERS
Nasdaq. The opening of trading in Facebook was delayed for "technical" reasons that are now being poked into by the SEC. Press reports indicate that order execution for many investors was sloppy and slow. Not the kind of publicity Nasdaq needed from the highest profile IPO of the year.
Morgan Stanley. MSCO got the highly coveted lead underwriter position. Then it had to earn its fee when the stock began threatening to drop below the $38 IPO price. MSCO may have bought a shipload of stock toward the end of Friday, when trading opened, in order to keep the price above $38. Tomorrow, the second trading day for Facebook, could bring more challenges.
Money managers. Mutual fund managers and other money managers like IPOs with big opening day pops. They use their market connections to score a big allotment of the IPO, and sell some of it into the pop, getting a fast buck that's needed. Most money managers don't match the S&P 500, and non-typical gains like IPO pops are important to help them stand out from the crowd. Facebook wasn't a good IPO for them.
Tech companies planning IPOs. The tepid Facebook pop may put a damper on IPOs planned by other tech companies. The "technical" problems encountered by Nasdaq, market of choice for tech companies, won't add to anyone's enthusiasm. If investors don't have a good time with a high profile IPO like Facebook, they'll be wary of other, less glamorous ones.
Mark Zuckerberg. Billionaire, just married, he's got to feel like he's at the top of the world. The market will disabuse him of that notion in a couple of trading days, at most. He'll learn that public company stocks are traded short term, which means that he's expected to deliver, every quarter on the quarter end. Whatever his long term goals for the company, the short term performance will have to be gorgeous, and then more gorgeous the next quarter, or the stock price will be hung, drawn and quartered (pun intended). It gets personal, too. One lousy press release from the company, and bad things will be done to his effigy. He'll be made to understand, not in a fun way, that short sellers will be a permanent presence in his life, trying to financially actualize schadenfreude. Sooner or later, one or more of Facebook's officers, directors and employees will leak inside information to family and/or friends, and embarrass the company when federal authorities swoop in. He'll feel betrayed, but he won't be able to prevent it. He'll feel every uptick and downtick of the stock's price, because shareholders will make sure he feels ticks. Any significant failings by the company will lead to his introduction to the most prominent class action plaintiffs lawyers in America. As SEC rules compel him to make disclosures about his compensation, perks, transactions with the company, holdings of company stock and a variety of other things, he might end up feeling like he has less privacy than the most effusive of Facebook users. Surely, Zuckerberg has already been counseled by his advisers about all of the foregoing. But the reality of his new life running a public company won't sink in until he lives the full, graphic experience. There's a price to pay for going public, and the bill collectors are gathering.
Saturday, May 21, 2011
Are the Social Networking Companies Approaching a Peak?
The frenzy over LinkedIn's IPO a couple of days ago, in which its stock more than doubled in price during its first day of trading, is reminiscient of the tech stock mania of the late 1990s. In those halcyon times, companies with no profits, scant revenue and highly optimistic business plans were going public with enthusiastically received IPOs. The stock market was pushed up to levels that it hasn't, on an inflation adjusted basis, since regained. Of course, we all know the tech stock craze went the way of leisure suits, although the financial consequences from stocks were much more painful.
Leisure suits have made a comeback of sorts in the past year or so. And so have tech stocks. The craze du jour is social networking, which proponents claim to be the grand future architecture of the Internet. Maybe. Something similar was said two decades ago about Microsoft, whose MS-DOS operating system was virtually ubiquitous among personal computers. But Gates & Co. didn't get the Internet, which was then struggling to organize itself around a concept called the World Wide Web. Then, a decade ago, portals were seen as the behemoths of the 21st Century. Today, only Yahoo is left as a major albeit struggling portal. A half dozen years ago, Google was expected to be heir to the Internet throne. Today, it is a growing and prosperous company whose vision thing is flagging. Google once was going to become the library to humanity. Legal squabbling over copyright ownership of large numbers of books has bogged down that initiative. Google is a leader in cloud computing, but Amazon will offer formidable competition. Goggle had to play catch up in the browser battles against a nonprofit that puts out Firefox. Google's failed attempt last year to buy Groupon was a signal that its ascendency to the throne of the Internet is no longer seen as inevitable. If Google is a sure fire winner, why wouldn't the Groupon folks want to associate themselves with Google?
But no matter that previous innovators have matured and shrunken to mere mortal companies. Social networking is hot, and investors pant for shares. Logical analysis fell by the wayside with LinkedIn. It had $15.4 million of earnings last year yet has a current market cap of around $8.8 billion. Its 95 million shares outstanding are worth $93 or so each at current market prices. Earnings per share are about $0.16, resulting in a price-earnings ratio of 581 to 1. Considering that the p/e ratio for the S&P 500 index based on trailing earnings is around 17, it's fair to say that investors are, at a minimum, extremely optimistic about LinkedIn.
Facebook, the big prize among anticipated IPOs, has dallied in the not very private private placement market, where transactions reportedly imply a valuation of as much as $70 billion. While the absence of solid public information makes Facebook's valuations somewhat amorphous, it's clear that public investors are getting whipped into a frenzy by all the press coverage of Facebook's private offerings. Facebook has indicated it might go public in the next year or so. When it does, that's likely to be a major signal of a peak in social networking stocks. A lot of really savvy Wall Street insiders huddle around the corporate insiders at Facebook. Those folks surely won't sell until they believe they can maximize the price they get, which by definition minimizes the bargain public investors will get. It's possible for public investors to make money from an IPO (Google is one example). But the IPO is a moment when the odds may well be stacked against the little guy. Invest carefully.
Leisure suits have made a comeback of sorts in the past year or so. And so have tech stocks. The craze du jour is social networking, which proponents claim to be the grand future architecture of the Internet. Maybe. Something similar was said two decades ago about Microsoft, whose MS-DOS operating system was virtually ubiquitous among personal computers. But Gates & Co. didn't get the Internet, which was then struggling to organize itself around a concept called the World Wide Web. Then, a decade ago, portals were seen as the behemoths of the 21st Century. Today, only Yahoo is left as a major albeit struggling portal. A half dozen years ago, Google was expected to be heir to the Internet throne. Today, it is a growing and prosperous company whose vision thing is flagging. Google once was going to become the library to humanity. Legal squabbling over copyright ownership of large numbers of books has bogged down that initiative. Google is a leader in cloud computing, but Amazon will offer formidable competition. Goggle had to play catch up in the browser battles against a nonprofit that puts out Firefox. Google's failed attempt last year to buy Groupon was a signal that its ascendency to the throne of the Internet is no longer seen as inevitable. If Google is a sure fire winner, why wouldn't the Groupon folks want to associate themselves with Google?
But no matter that previous innovators have matured and shrunken to mere mortal companies. Social networking is hot, and investors pant for shares. Logical analysis fell by the wayside with LinkedIn. It had $15.4 million of earnings last year yet has a current market cap of around $8.8 billion. Its 95 million shares outstanding are worth $93 or so each at current market prices. Earnings per share are about $0.16, resulting in a price-earnings ratio of 581 to 1. Considering that the p/e ratio for the S&P 500 index based on trailing earnings is around 17, it's fair to say that investors are, at a minimum, extremely optimistic about LinkedIn.
Facebook, the big prize among anticipated IPOs, has dallied in the not very private private placement market, where transactions reportedly imply a valuation of as much as $70 billion. While the absence of solid public information makes Facebook's valuations somewhat amorphous, it's clear that public investors are getting whipped into a frenzy by all the press coverage of Facebook's private offerings. Facebook has indicated it might go public in the next year or so. When it does, that's likely to be a major signal of a peak in social networking stocks. A lot of really savvy Wall Street insiders huddle around the corporate insiders at Facebook. Those folks surely won't sell until they believe they can maximize the price they get, which by definition minimizes the bargain public investors will get. It's possible for public investors to make money from an IPO (Google is one example). But the IPO is a moment when the odds may well be stacked against the little guy. Invest carefully.
Monday, January 17, 2011
A Key to Facebook's Valuation
Recent press reports indicate that Facebook may go public in a year or so. Its recently reported private placement deal with Goldman Sachs supposedly put a $50 billion valuation on Facebook. Many think this is an optimistic number. Conventional measures of value are hard to apply to Facebook because it doesn't publicly disclose its finances. Uncertainties about its business model add to the problem. One wild card is the continued evolution of online privacy policies.
In many respects, online privacy is an oxymoron. Every day brings news of yet more security breakdowns and thefts of personal information. There doesn't seem to be a website that can't be hacked into, one way or another.
But online crime isn't the most important factor affecting online privacy. The commercialization of the Internet is far more significant. Businesses that want to sell your personal information will do much more to reduce online privacy than pimply kids eating junk food in front of computer screens.
Banks are starting to place targeted ads in your online statements. If your bank account shows, say, several recent debit card charges for fast food breakfasts, you may be offered a discount on your next Egg McMuffin. Some bank customers may like the idea of getting a discount while they review their account activity. Others will be creeped out by the idea that the most confidential financial information they have is being mined for the further profitability of purveyors of salt, sugar and fat. Many customers would be outraged at the possibility that insurance companies might pay to know about their slovenly eating habits and charge them higher life, health or disability insurance premiums. Actual insurance company access to your bank account hasn't been reported in the news, but don't think insurers--and the websites that are collecting your personal information--aren't pondering the possibility.
Banks have a lot of ways to make money, yet they are trying to profit from selling your personal information. Think of the pressures on Facebook, which has far fewer potential revenue streams than a bank. The most valuable thing Facebook has is the personal information it gathers about its members. If it can't find a way to monetize that data, its future could be difficult.
The FTC is proposing guidelines about online privacy. Members of Congress are getting interested in the issue and may offer legislation. One way or another, the law in this area will evolve and soon. When it does, Facebook's stock market value could rise or fall, depending on what rules are imposed. Indeed, since the monetization of personal information is likely to be Facebook's biggest potential revenue stream, online privacy laws could be crucial to determining the company's valuation.
In many respects, online privacy is an oxymoron. Every day brings news of yet more security breakdowns and thefts of personal information. There doesn't seem to be a website that can't be hacked into, one way or another.
But online crime isn't the most important factor affecting online privacy. The commercialization of the Internet is far more significant. Businesses that want to sell your personal information will do much more to reduce online privacy than pimply kids eating junk food in front of computer screens.
Banks are starting to place targeted ads in your online statements. If your bank account shows, say, several recent debit card charges for fast food breakfasts, you may be offered a discount on your next Egg McMuffin. Some bank customers may like the idea of getting a discount while they review their account activity. Others will be creeped out by the idea that the most confidential financial information they have is being mined for the further profitability of purveyors of salt, sugar and fat. Many customers would be outraged at the possibility that insurance companies might pay to know about their slovenly eating habits and charge them higher life, health or disability insurance premiums. Actual insurance company access to your bank account hasn't been reported in the news, but don't think insurers--and the websites that are collecting your personal information--aren't pondering the possibility.
Banks have a lot of ways to make money, yet they are trying to profit from selling your personal information. Think of the pressures on Facebook, which has far fewer potential revenue streams than a bank. The most valuable thing Facebook has is the personal information it gathers about its members. If it can't find a way to monetize that data, its future could be difficult.
The FTC is proposing guidelines about online privacy. Members of Congress are getting interested in the issue and may offer legislation. One way or another, the law in this area will evolve and soon. When it does, Facebook's stock market value could rise or fall, depending on what rules are imposed. Indeed, since the monetization of personal information is likely to be Facebook's biggest potential revenue stream, online privacy laws could be crucial to determining the company's valuation.
Wednesday, January 5, 2011
Maybe Facebook Just Wants to Keep Mum
The SEC is reportedly interested in Goldman Sach's recent deal with Facebook to invest around $500 million and maybe up to $2 billion, some of which will be raised from well-to-do investors. A lot of speculation has popped up in the financial press about what Facebook is doing and why the SEC might be nosing around. Commentators harrumph about the burdens of complying with the federal securities laws and insinuate that the SEC's interest may amount to regulatory overreach that interferes with financial innovation. They imply that Facebook and GS may be fashioning a brave new financing structure for companies that don't want to be forced into the SEC's 1960s vintage regulatory model, and that the SEC is poking around to protect its turf.
The truth may be a lot simpler. Facebook hasn't publicly defined a clear business model. There is good reason to suspect it doesn't have one. It doesn't sell anything to users, and derives much of its revenue from banner advertising. Banner ads aren't generally viewed as the wave of the future for websites. So Facebook is most likely a work in progress.
Its biggest rival is Google, and Facebook doesn't participate in Google's targeted advertising programs. If Google could place targeted ads on Facebook, it might be able to collect enough information to develop its own, improved social network (and Google has the cash--maybe $30 billion plus--to do it). Facebook might, in effect, provide Google with the means to undermine Facebook.
Facebook could try to develop its own targeted advertising program (after an early failure in 2007). But that would take a lot of work, and would put it in direct competition with Google and Google's $30 billion cash hoard. Facebook may be an aircraft carrier to Google's battleship, but an aircraft carrier doesn't want to get within range of a battleship's big guns. So Facebook is probably still figuring out what its principal revenue streams will be.
The SEC's disclosure regulations would require Facebook, if it went public, to reveal a lot about its business activities and risks. First and foremost, Facebook would have to report detailed financial information; and the impression one gets is that Facebook isn't a gusher of net profits yet. If its business model is still a work in progress, it won't have the most glowing picture to paint. That would translate into a less than meteoric rise in its stock price.
A company doesn't go public until it's got a good story to tell about itself. That's how insiders get juicy valuations for their shares. Facebook has little incentive to try to develop a new financial paradigm to go "public" in a private manner, because it wouldn't maximize share price right now. There's a news report on Money.cnn.com saying that Facebook will use the money it's raising from Goldman to buy back employee stock and keep the number of investors below the 500 shareholder level where Facebook would have to start filing the reports required of a public company. http://finance.fortune.cnn.com/2011/01/05/facebook-raising-goldman-money-so-it-wont-go-public/ Assuming that's true, the whole point of the GS deal is to avoid going public. That would seem to make sense, from a business standpoint. The SEC will find whatever it finds in its inquiry, and the possibility that GS and Facebook might have tripped over a regulatory requirement somewhere cannot be discounted. But the whole thing may be, not a sneak IPO, but a bid to stay private until Facebook's founders can hear the cash register ringing really loudly.
The truth may be a lot simpler. Facebook hasn't publicly defined a clear business model. There is good reason to suspect it doesn't have one. It doesn't sell anything to users, and derives much of its revenue from banner advertising. Banner ads aren't generally viewed as the wave of the future for websites. So Facebook is most likely a work in progress.
Its biggest rival is Google, and Facebook doesn't participate in Google's targeted advertising programs. If Google could place targeted ads on Facebook, it might be able to collect enough information to develop its own, improved social network (and Google has the cash--maybe $30 billion plus--to do it). Facebook might, in effect, provide Google with the means to undermine Facebook.
Facebook could try to develop its own targeted advertising program (after an early failure in 2007). But that would take a lot of work, and would put it in direct competition with Google and Google's $30 billion cash hoard. Facebook may be an aircraft carrier to Google's battleship, but an aircraft carrier doesn't want to get within range of a battleship's big guns. So Facebook is probably still figuring out what its principal revenue streams will be.
The SEC's disclosure regulations would require Facebook, if it went public, to reveal a lot about its business activities and risks. First and foremost, Facebook would have to report detailed financial information; and the impression one gets is that Facebook isn't a gusher of net profits yet. If its business model is still a work in progress, it won't have the most glowing picture to paint. That would translate into a less than meteoric rise in its stock price.
A company doesn't go public until it's got a good story to tell about itself. That's how insiders get juicy valuations for their shares. Facebook has little incentive to try to develop a new financial paradigm to go "public" in a private manner, because it wouldn't maximize share price right now. There's a news report on Money.cnn.com saying that Facebook will use the money it's raising from Goldman to buy back employee stock and keep the number of investors below the 500 shareholder level where Facebook would have to start filing the reports required of a public company. http://finance.fortune.cnn.com/2011/01/05/facebook-raising-goldman-money-so-it-wont-go-public/ Assuming that's true, the whole point of the GS deal is to avoid going public. That would seem to make sense, from a business standpoint. The SEC will find whatever it finds in its inquiry, and the possibility that GS and Facebook might have tripped over a regulatory requirement somewhere cannot be discounted. But the whole thing may be, not a sneak IPO, but a bid to stay private until Facebook's founders can hear the cash register ringing really loudly.
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