One of my father's favorite sayings was, "The more things change, the more they stay the same." I am reminded of that saying constantly as I watch the carnage over the last month or so in the social-media stocks (see chart below). The implosions in Facebook (FB), Zynga (ZNGA) and Groupon (GRPN) have cost investors some $60 billion from the highs of their initial public offerings.
Not much more than a decade removed from the Internet bust, investors once again fell for the siren song of a technological theme that was "going to change the world." Led by the usual underwriting cheerleaders, like Morgan Stanley (MS) and Goldman Sachs (GS), investors lined up to oversubscribe offerings for these IPOs, overlooking obvious red flags.
Investors did not heed Groupon's overaggressive accounting methods, and they they ignored decelerating sequential revenue growth rates at Facebook and Zynga. They were not alarmed by massive insider selling at Zynga, nor by the two classes of stock at Facebook. Simply put, investors wanted to believe so badly in the social-media story that they ignored the seeds of the coming implosion of their investments. Numbers tell an almost embarrassing story of hope over investment fundamentals.
Here are 10 interesting numbers from the social-media heist.
- 28: The age of Mark Zuckerberg, the hoodie-wearing CEO of Facebook, a company to which investors were only too happy to assign a $100 billion valuation. After Facebook completed its IPO, Mr. Zuckerberg promptly got married and went on a nice honeymoon.
- $812 million: The difference between Groupon's 2011 first-half revenue of $1.5 billion using its accounting methods, and the $688 million in sales under generally accepted accounting principles (GAAP)
- 80 million: The number of additional shares Facebook insiders and early investors offered to sell once the company's offering became oversubscribed
- $500 million: How much early investors and insiders were able to sell to the public in a secondary offering in April, two months before the official "lock-up" period ended
- $1 billion: What Facebook paid pre-IPO for Instagram, a company with 13 employees and no revenue -- a decision made with little involvement from Facebook's board
- $255.4 million: What Groupon lost in the first half of 2011, prior to becoming a public company
- 1.6 billion: The amount of insider shares that will be "unlocked" from Facebook's IPO date until the end of the year.
- 50%: The proportion of voting shares that Zynga CEO Mark Pincus still controls, even though he's reaped hundreds of millions of dollars selling a good portion of his original shares
- 57%: Not to outdone, Facebook's CEO controls an even higher percentage of voting shares.
- 15 to 20 years: The likely jail term for at least one of these CEOs if the U.S. had a just and functioning regulatory system
Lessons learned for investors going forward:
- Invest in stocks and IPOs with strong fundamentals, not those with good stories.
- Don't ignore red flags, even if it means passing on an investment that seems very enticing otherwise.
- Very few stocks, if any, are worth more than 100x earnings.
- If insiders are selling, ask yourself why are you buying.
Note: No one is completely immune to succumbing to a good theme. I booked profits from shorting Groupon, but I lost 40% of those winnings by trying to bottom-fish Zynga shares once they got under $5.