Wednesday, May 23, 2012

Facing Fad Failure

Remember the "Dot Com" crash? It was the '90s and the market was booming over the Internet. Something very unusual was going on with regard to investments. The simple model had always been that a company had capital. That capital was very tangible. It could be audited as equipment and facilities. Storefronts and factories with inventory and customers could be counted then divided up into shares with a measurable value. You could look at receivables to evaluate sales and future revenue. You could see the debts and balance that against the equity held. There was some actual "there" there.

Then came the Internet. Suddenly you've got intellectual capital and a business model based on information which might be mined for a profit somehow. People would interact for free in this grand information exchange and along the way drop little tidbits that could be gleaned for profit. The business plans were complicated and as things developed, largely imaginary. Suddenly venture capital that had been dumped on these schemes evaporated as many could not figure out how actual profit would ever emerge. The Dot-Coms collapsed.

A few survived and thrived but across the market there was a disaster. For every Amazon or Google there were a thousand pie-in-the-sky programs with no value. Lessons were learned...and now apparently forgotten.

Facebook went public this week. The IPO was hyped and investors lined up to beg, cajole, plead and whimper to be a part of it. There was that exclusiveness cachet about only the walruses being able to buy-in on day one. Anticipation grew and estimates of what would happen as the stock soared stumbled over each other in creating a Camelot. Zuckerberg smiled at the thought of taking his billions to the foreign shores to escape the Bamster's confiscation squads. He went so far as to make his live-in a respectable woman.

Two days later we've got a slide into yesteryear. The initial price rapidly declined and the search for value seems futile.

Facebook Fade Fuels Future Pessimism

Possibly the scariest line in that analysis is the estimate that Facebook must grow revenue by 41% annually(!) for the next five years to avoid "cratering". That simply isn't possible in a real world.


immagikman said...

Im thinking that anyone who thought they were going to strike it rich with a Face Book IPO deserved to lose what they invested. In IPO's usually the only big winners are the people who already own a fair chunk of the thing. And that is exactly what happened again, all the privately invested people took their profits while the sheep were begging to be fleeced.....most of my friends expected just this outcome.

juvat said...

Ed, My dad demanded I read Extraordinary Popular Delusions & the Madness of Crowds before I made my first investment after commissioning. Whether it's Dutch Tulips in the 1600's or Facebook in the 2000's, not one damn thing has changed.
Which, if I'm not mistaken, is what you just said.

The Donald said...

+1 Juvat - Even armed with a modern periodic table of the elements, there are some who will try to convince others they can turn Pb into Au.