From: James Cramer
Sent: Wednesday, May 09, 2012 5:58 AM
To: Nicole Urken
Subject: Countdown to FB
What I am looking at: Evaluations of all social media either in one segment or several—IPO mechanics, trading history, valuation, biz model, competitive positioning; History of the dotcoms (1999-2001)—Valuations and look at the survivors; FB drivers/concerns
From: Nicole Urken
Sent: Wednesday, May 09, 2012 6:32 AM
To: James Cramer
Subject: Countdown to FB
Sounds good. We will work on these for the FB segments next week
All week on "Mad Money," we have gone through the Facebook statistics and valuation —comparing the company to recent social media initial public offerings and also tech IPOs a decade ago. However, valuation is ultimately dependent on future earnings and revenue growth, which depends largely on CEO Mark Zuckerberg's vision and ability to capture more of the ad market and increase revenue per user (at about $5 in 2011) while managing costs.
The flurry of Facebook analysis and discussion has reached new heights this week with the stock opening on the Nasdaq Friday. The stock’s pricing at $38 per share, the high-end of its upped price range, crowns Facebook as the largest tech IPO ever and values the company at over $100bn. At over 900mm monthly active users, qualifying the company as a growth story is probably the understatement of the era — particularly when comparing it to just a handful of years when I started using Facebook in 2004 with a couple of other thousand Harvard students. Talk about the Silicon Valley dream.
While there are indeed a fair share of skeptics pointing to concerns (including the lofty valuation, slowing growth, and mobile user obstacles), the overriding sentiment surrounding the IPO is one of raw excitement, with Zuckerberg soaring to new heights of celebrity status. Facebook’s growth prospects, unique advertising opportunity (of course highlighted by targeted ads given its 901 million monthly active users), and platform upside (including growing social games) all fuel the growth story fire. In many ways, Facebook is unique as both a tech company and a consumer company. And while there has been much focus on the actions of the insiders and big time investors, FB’s public debut has become the retail investor event of the decade given the degree reach of its use across the population.
This hype surrounding the company and faith in its CEO — particularly from retail investors — is particularly notable, because it stands in direct contrast to what is happening in the rest of the market in three key ways: (1) Facebook excitement reflective of IPO market hype for new growth names vs. lukewarm aftermarket responses for the same companies, (2) Willingness to suspend disbelief when it comes to Facebook risks vs. “sell first, ask questions later” for growth companies that have already been trading and, (3) Willingness to celebrate growth stocks vs. continued flight to safety given the overhangs in Europe and beyond.
Bifurcation between the IPO market and the aftermarket
There indeed has been a bifurcation between the IPO markets and the aftermarket. We of course have seen this clearly in the social media cohort alone — for example with LinkedIn up 109 percent in its first day of trading last May, Groupon up 31 percent in its first day in November andYelp up 64 percent in its first day this past March, just to name a few.
The aftermarket returns, in contrast, have been dismal. Even LinkedIn, which is up in the aftermarket currently, hit a low almost 40 percent below where it closed in its first day of trading. Not to mention that the aftermarket returns from the likes of Groupon, Yelp, Zynga, Pandora are deeply in the red. In other words, investors have been excited about the “next hot thing” — feeding a pop that in part is engineered by the mechanics of the offering, with only a sliver of shares being offered — but then have started asking questions once the stock starts to trade at lofty levels.
We are seeing this “hot IPO-lukewarm aftermarket” phenomenon extending beyond social media as well to other new growth names. Look no further than the pops from organic food company Annie’s that was up 89 percent in its first day, luggage and accessories maker Tumi Holdings up 47 percent in its debut, big data play Splunk up 109 percent and e-commerce name Demandware up 47 percent, as a selection of examples. After such initial pops, all of these are down in the aftermarket, with the exception of Annie’s up only meagerly.
Ultimately, the discrepancy between the hot IPO opens and the lukewarm aftermarket performance from the new growth companies is key to be aware of to protect yourself in the aftermarket, something we have emphasized all week on "Mad Money."
Willingness to suspend disbelief when it comes to Facebook risks vs. “sell first, ask questions later” for companies that have already been trading
The market opportunity and growth prospects for Facebook are undeniable — particularly given the company’s current small share of the $600bn worldwide advertising market and its online ad subset (which is growing exponentially from just over 10 percent of this total in 2010). That said, as noted, there remain many questions about the future trajectory of Facebook — particularly on its growth rate given its high valuation.
However, as the Facebook excitement continues to bubble, we see heightened skepticism for other growth companies. Just look at this past earnings season, where any company that had to face questions about their growth or business model was shot down severely. Look no further than single-serve coffee play Green Mountain that was down about 50 percent after its quarter due to skittishness from investors over growth. Nutritional supplement company Herbalife fell a cool 30 percent after well-known short-seller David Einhorn questioned the company’s distributor business model — not new questions by any means. And watch/accessories behemoth Fossil has fallen over 40 percent after it presented some concerns on sales in Europe. While these moves represent some of the more extreme examples, we saw investor selling even when there were concerns about a more tempered growth outlook — from the likes of Domino’s Pizza for example has fallen almost 20 percent since its quarter.
Ultimately, we will have to see how long investors give Facebook the benefit of the doubt — particularly when so much depends on Zuckerberg and his team’s execution. Of course, if Facebook manages to correctly guide (and temper) investor expectations and beat estimates, potential volatility and sell-offs likely won’t be in the cards.
Excitement for Facebook is the quintessential example of the thirst for new growth and stands in contrast with skepticism in the market
Certainly, this is a unique time in American business and for the younger generations, where social media has become the dominating buzz term instilled with a sense of opportunity. Investors are excited about opportunities for growth, particularly amidst tepid U.S. gross domestic product figures that accompany the slow/lumpy employment growth in this country, continued worries about a slowdown in emerging markets (notably China) and of course the continued overhang in Europe.
Especially within the tech universe, we see investors searching for growth. After all, the notion of value tech has been very tough — look no further than Nokia, Research In Motion and Hewlett-Packard, which have failed to keep up with the fast pace of consumer change. Even the well-positioned Google hasn’t done much for your portfolio since the beginning of 2010. The winners instead? Names that continue to cater to the consumer frenzy like Apple. Or tech names aligned with the important growth themes we have talked about like cloud computing services provider Salesforce.com and big data by way of EMC and IBM for example.
But while the excitement for Facebook has reigned in recent weeks — and particularly today — faith in stocks by individual investors remains low, as unsettling memories of the past ring strong — including the dot-com bubble burst a decade ago, the wealth destruction of the recent financial crisis in 2008-09, the flash crash in 2010 that exposed lack of protections in the market system, insider trading cases, leveraged exchange-traded funds that can overly influence the movements of their constituent stocks. We see this as money continues to pour into U.S. Treasurys despite record-low yields. We have seen the cyclical sectors — like industrials, energy and materials — sell off over the last month while the more defensive utilities, consumer staples, and healthcare names have outperformed.
Of course the déjà vu factor from 2011 is in effect — with European concerns dominating coupled with U.S. fiscal cliff and questions over emerging market growth. These risks in the market need to remain front of mind, as Europe in particular remains in flux.
Ultimately, today is “Facebook Day” — the quintessential social media company marks a new era for American business as it becomes public. But we cannot forget the rest of the market. This is true for Facebook at an individual company level, where we need to remember that FB will shift from an ethereal private company to play the Wall Street game where high growth companies with high valuations must meet expectations. And it is true when considering the macro environment and stock sentiment—particularly regarding appetite for risk in a still uncertain environment. For today though, happy IPO, Facebook.
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