I'll say it right at the top: I want the Facebook IPO to succeed. I want it to succeed because I want people to be excited about investing in stocks, and they are not right now ... and haven't been for a while.
OK, I said that. Now, how come when I express even the tiniest bit of skepticism — about the valuation, about the cult-like belief in the company, about anything — people harass me, claiming that "I just don't get it"?
Valuation? You're joking. Investors don't care about metrics. All they care about is how much stock they can get. Every institution is going to own this.
Here's what I think: Facebook is a giant call option on a vague belief that this company has more information about everyone on earth than anyone has ever gathered, and that it is somehow going to find some secret sauce that is going to unlock a tsunami of profits.
If you believe that, then you should buy Facebook. At almost any price. If you are skeptical...
Here is what a dialogue with a Facebook bull sounds like (I am splicing together many conversations I have had in the past week):
"Bob, I don't understand why you're skeptical..."
"Let's start with the valuation. I don't get it. They earn 50 cents, people think it's going to open at $50 or $60, or even higher? So we're at 100 times earnings right off the bat..."
"Bob, you're looking at this the wrong way. First, they're going to boost earnings. Second, it's not about earnings. It's about growth. There's no growth in the world. We're in a 2 percent GDP in the U.S. Investors are desperate for growth. Facebook has it. In spades. "
"But wait — revenue growth is slowing. And how are we supposed to value it? You're not going to tell me that the way to value it is a multiple of cash flow..."
"Of course that's how to value it."
"Isn't this what everyone said in 1999? Remember all the talk about eyeballs per click and other exotic valuation methods...."
"Bob, forget about 1999. This is not 1999. And valuing a company on a multiple of cash flow is not an exotic valuation method. Think of a company like LinkedIn. They trade at maybe 38 times EBIDTA ... if you apply that valuation to Facebook, you get about $50. The valuation is not unreasonable."
"So when will earnings matter? They mattered in 2000."
"In a couple years, they will matter. It will get better. And stop bringing up the dot-com bust!"
"You really believe that they have developed some kind of new ad paradigm to take advantage of all this information? That they're going to figure out some magical formula that's going to make money out of everyone's friends LIKING something? Can't they LIKE Subaru now? Is that making a difference? GMdoesn’t think so."
"They can LIKE it, but there's still not a methodology to turn that into a convincing increase in sales. They are getting better at understanding the information. They will figure it out.
"You have an awful lot of faith."
"Bob, it's much bigger than that. It's not just a new ad paradigm. There will be new revenue streams. They're going to find a way to monetize banking and gaming and entertainment. There's going to be Facebook Banking. And Facebook Gaming. And Facebook Movies."
"And a Facebook Salami? A Facebook Lawn Mower? A Facebook Escort Service?"
"Not funny, Bob."
"Look, they already said they are not making any money from mobile ... but that's what everyone is using!"
Ugh. It goes on and on. I want Facebook to succeed. I do not want all those mom and pops who buy it at sky-high prices to be soured and embittered three months from now.
I'm just not looking at this right. I need to change my outlook. To do that, I need to keep repeating the mantra: It will find a way ... it will find a way ....
I think I'm starting to believe.
P.S.: Facebook insiders own the stock at an average price of $1.11. God bless America.
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