And if the FB IPO ends up being perceived as primarily a massive transfer of wealth from enthusiastic well-meaning small investors to the brokers and investment bankers?
There is no line between "well-meaning small investors" and the banks. They are playing the same game.
People who put money into Facebook early were hoping to get rich(er); they didn't do it out of the goodness our their heart. It's an SV fallacy that angels are, well, angels.
I'm not saying anyone was being charitable, I'm saying there might be a psychological demand effect that applies to long term "value" investors and not just hype-driven day traders.
I'm no investment pro but FB's valuation seems unjustified to me, so I'm searching around for explanations. Where is this additional demand for these shares coming from?
The best explanation I can come up with is that FB benefits from its massive base of engaged users. I imagine there are a great many individual investors who are torn between wanting to participate in "internet tech" and wanting to not invest in what they don't understand. FB comes along and I imagine many of them to reason "I use it all the time, therefore I understand it". I believe Microsoft has also benefited from this effect.
These people believe they are value investing, not playing the market.
>The best explanation I can come up with is that FB benefits from its massive base of engaged users. I imagine there are a great many individual investors who are torn between wanting to participate in "internet tech" and wanting to not invest in what they don't understand. FB comes along and I imagine many of them to reason "I use it all the time, therefore I understand it". I believe Microsoft has also benefited from this effect.
Microsoft also sold products, and had a very strong revenue stream from that. Hype helped MS grow, but their core business fundamentals have traditionally been pretty strong.
Facebook seems overvalued by at least 300%, maybe more. A quick look at tech companies that have about $100 billion market cap(like Facebook), and the closest comparison I can come to is Oracle. Unfortunately, the comparison doesn't look good for Facebook.
Oracle's revenue for 2011 was around $35 billion, which is 10 times Facebook's. Net income was around $8.5 billion(from here: http://www.oracle.com/us/corporate/investor-relations/financ... ). Facebook, according to their SEC filings, had a net income of $1 billion in 2011.
I think that Facebook's valuation is driven entirely by hype, which really means that the stock should perform quite well for the next 30-60 days, until Q2 earnings are released. At that point, I have a feeling that it will drop when investors realize that FB isn't pulling in nearly as much money as their stock is indicating.
