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Social Media: You Know You’re In a Bubble When…

Posted by Larry Doyle on June 19, 2012 7:17 AM |

Social media is all the rage and is changing the world. Correct? But, of course.

Any marketing initiative by self-respecting entities incorporates a significant social media component. Also true. How should investors play this hot new trend?

VERY CAREFULLY.

How interesting that the Wall Street Journal’s front page story this morning addresses issues in this space by writing, Investors Miss Web IPO Payoff. Perhaps the WSJ was prompted to address this “deflating” story by a harder hitting commentary posted a few days ago by The Economic Warrior, Barry J. Dyke. 

Dyke, author of a recently released book, The Pirates of Manhattan II, pulls no punches in pointing out the flow of bubbly.

Barry James Dyke, author of The Pirates of Manhattan II: Highway to Serfdom concludes that social media initial public offerings (IPOs) are the latest bubble brought to you by Wall Street and connected executives.

The author comments, “Like the high-tech dot.com and subprime mortgage bubbles, social media new share issues—IPOs—have the ingredients for another financial bubble. With sleight of hand media coverage, perennial false optimism and truckloads of hype, Wall Street continues to dump questionable companies onto an unsophisticated public.

Facebook is the poster child for pump and dump. The company came out at $38 a share on May 18th, went to $42 and by June 5th Facebook trades at $25.87.  (Facebook closed yesterday at $31.49…LD) Insiders and institutional investors pocketed a cool $16 billion payday and bankers pocketed $150 million in fees—while investors lost 32% of their investment in three weeks. It is a circus brought to you by Wall Street and connected insiders, and the circus has already left town.”

Some Facebook insiders sold big chunks of ahead of the IPO. Sean Parker sold 3.6 million shares in a private transaction on March 31. Morgan Stanley, Goldman Sachs and JPMorgan Chase [which just lost $2 billion in the “London Whale” derivatives trade] raised $16 billion for Facebook.

Other recent initial public offerings (IPOs) contribute to bubble investing—where shaky companies with questionable business models are sold to the public. Zynga, the company that supplies Facebook with games is down 38% from is December 2011 IPO. Groupon, the daily deals website, and Pandora, the streaming music company, are down 41% and 34% respectively from their recent IPOs. Ren-Ren, the Chinese Facebook is down 67% from its May 2011 IPO. Zipcar, Inc.—the car sharing network is another bonehead IPO. In April 2011 Zipcar was $25.79 a share, by June 5th it is $9.10 a share, which means the company lost more than 60% of its value. [LinkedIn, the professional marketing website—appears to be the exception to the bubble].

“Facebook valuations were insane,” claims Dyke. “Bankers were valuing the company 100 times earnings while a company like Apple is only 13 times earnings. “This is Monopoly money and Facebook is Boardwalk. Insiders and early investors made a fortune, while consumers are fleeced like sheep.”

The author continues, “What makes Facebook an incredible fleece is that the company issued two classes of stock. After the May IPO, founder Mark Zuckerberg owned 18 percent of the company but owned 57 percent of the voting shares—putting him in total control of the company. Two types of shares is a way insiders vacuum money from the public while keeping control in private hands. Zuckerberg was able to buy Instagram—the photo sharing company for $1 billion two weeks prior to the IPO without board approval. It is insane.”

Facebook is not alone in this dual class ownership—which favors family and founders. The New York Times and The Washington Post (whose CEO Don Graham is on the board of Facebook), also have dual class shares—where families and founders retain control. Google, LinkedIn, Groupon, Yelp and Zynga have this ownership structure as well.

“Banks cannot manage their own finances or share price, but they are continuing to dump over-hyped stocks onto the public. UBS, Citigroup, Citadel and Knight Capital—have combined underwriting losses of $100 million on Facebook; investors have lost over $10 billion in three weeks. This type of behavior is reminiscent of 1929 before the stock market crashed. And with the imminent failure European Union brought to you by Europe’s central bankers and the euro; the world could be 1931 before you know it. Woe is us.”

Thanks to the regular reader who brought this story to my attention. I am not an individual stock picker per se, but with a wide array of social media IPOs down 17% to 67%, the evidence of a bubble in this space is overwhelming.

For investors interested in the social media space, I am compelled to write emphatically . . . CAVEAT EMPTOR!!

Look for The Economic Warrior on the Sense on Cents blogroll on a going forward basis and as always  . . .

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Tom

    Classic cases of “pump and dump”…

  • Ron Larson

    I respectively disagree that the Facebook IPO was an insider rip off like the tech IPOs before. On the contrary, I think FB did it right and prevented themselves from being ripped off by insiders.

    Here is an analogy. You own a house. You hire a real estate agent to help you sell it. She convinces you to list it at $200k. It sells quickly. The next week you discover that the buyer was a friend of hers, and that the buyer flipped the house 3 days later for $400k. And you also find out that this guy also gave your agent a nice cut of his $200k profit.

    If this happened to you, you would sue for fraud. Your agent and her friend stole money from you. Yet this was the IPO model practiced by Wall Street for tech companies.

    They would take a company public by underpricing the IPO, locking in large blocks of shares for themselves and their “friends”, then pumping the stock that the insiders held before dumping it. The victim was the company. That money should have gone to the company to buy materials, hire people, and to grow the company. Instead, that capital that was raised by the IPO was diverted in to the pockets of the Wall Street insiders.

    In FB’s case, FB got it right. Their stock price did not double and triple after the IPO. That means they got top dollar for the shares they sold. The perceived value of the shares was fully realized by FB instead of insiders who got in dirt cheap because of connections.

    Somewhere along the long we have forgotten why a company sells shares. They do so to raise capital to fund growth. Buyers of these shares are betting that the company will be able to take their money and make it grow in value by growing the business.

    Now, Wall Street is nothing more than a gambling den looking for a greater idiot to buy a share for more than you paid for it. They celebrate when a company’s stock doubles in value overnight. I don’t. I see that as a failure by the company to sell itself at the right price and allowing itself to be ripped off. Just like the real-estate ripoff analogy, they trusted “experts” who were not looking out for the seller’s best interest.






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