The Facebook Face-Plant: “Nobody Put a Gun to Their Heads”

A friend called up today about the Facebook “Face-plant” hysteria: he wanted to know why everybody was looking for somebody to blame.

“They wanna blame the underwriters, they wanna blame the analysts, they wanna blame NASDAQ, they wanna blame the insiders. But how about they look in the mirror?” he said. “Nobody put a gun to their heads and told ‘em they had to buy it.”

And he’s right.

In fact, there was plenty about Facebook to make a sober investor take pause even before it became a badge of honor to tell the Wall Street Journal you were going to load up on the stock, as so many investors did.

Check out, for example, the following sequence of quarterly revenue growth starting in March 2011 and ending in March 2012:

111.88%, 107.18%, 104.28%, 54.72%, 44.73%.

Now ask yourself, “Is this a company I want to buy at any price?

Well, that’s the annual growth rate in Facebook’s quarterly revenues, straight off our Bloomberg. Not exactly “up and to the right” as they say on Wall Street.

Here’s another set of numbers—also publicly available—that might have flashed an even bigger yellow warning sign for a prospective Facebook IPO flipper:

140.66%, 114.56%, 79.77%, 58.99%, 32.15%.

That’s the growth in quarterly revenues from last March to this March, also straight off our Bloomberg, for Zynga.

Zynga, as most Facebook fans know, is the equivalent of a hotdog vendor in Yankee Stadium: the only place it sells its stuff is on Facebook. If you follow how the hot-dog vendor is doing on any given day, you have a pretty good idea how full Yankee Stadium is.

So you would think anybody buying Facebook would have looked at not only Facebook’s revenue progression, but Zynga’s as well.

And given those trends, you’d think anybody buying Facebook would have paid attention to the other warning signs, like GM pulling its ads off Facebook the week before the IPO; like the underwriters ramping up not only the deal price but the deal size; like CNBC devoting the entire day of the IPO to Facebook—that sort of thing.

And of course you’d be wrong.

People wanted to buy Facebook, no matter what.

And those people can blame the underwriters or the analysts or NASDAQ or the insiders all they want.

But as my friend said, “Nobody put a gun to their heads.”

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2012) Available now at Amazon.com

© 2012 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. And if you think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the entertainment of the reader, and the author.