Tech Bubble Death Watch: The Facebook IPO

Financial bubbles are like bad relationships. You often can't tell for sure that you're in one until it's over.

But it's usually pretty easy to see the warning signs, of both bad relationships and bubbles, and brace yourself for the inevitable bout of weeping and binge-eating.

Which brings us to Facebook's IPO, and to The Huffington Post's latest Pulitzer-eligible feature, the Tech Bubble Death Watch.

As you have perhaps heard by now, the social network is about to dump a truckload of shares on the public, in an offering that will value it at more than $100 billion, a number most sentient humans agree is optimistic, to put it charitably. And yet people cannot get enough of this stock.

As you have also maybe heard, everybody and their grandmother thinks this is the sign of a new bubble in technology companies. And you know what? So do we. You can't always trust everybody and their grandmother, but sometimes they are absolutely right.

So this seems like the ideal time to launch what we're calling the Tech Bubble Death Watch. Here's how it works: Using a finely tuned analytical approach (guessing), we assign a numerical value between 1 and 5 to the day's big tech-bubble news. Higher numbers indicate a greater risk that we are in the insane-frenzy phase of the tech bubble. Lower number numbers mean your retirement money is safe for the time being.

So what number does Facebook's IPO deserve? A full-on five. It's just too big of a target for anything lower. This is a watershed moment for the bubble, the only one you can be sure that everybody and their grandmother is aware of.

Sure, sure, you can argue that this is more likely the beginning of the bubble than the end. The stock could well tank tomorrow in its first day of trading, a sign investors are being smarter than we think. Or it could pop for one day, then fall for a while and be propped up by bargain hunters -- again, somewhat rational behavior.

Update: The stock priced Thursday night at $38 a share, opened Friday morning at about $42 and was trading around $40 a share at lunchtime on Friday -- not a disaster, but not exactly a bubble-like runaway surge, either. At the same time, its latest market valuation of $118 billion would make it one of the 25 biggest companies in the S&P 500, if it were part of that stock index. Does that sound right to you? Here's the Huffington Post's live blog covering the first day of trading.

But if we are indeed in a new tech bubble, then this moment will be the one we all remember, like Netscape and Pets.com in Tech Bubble 1.0.

Also, how the heck can we launch a new feature like this with anything less than a five? It is decided. And it is arbitrary, we know, so save your hateful emails.

Let's go to the evidence.

First, here's what Facebook has going for it: It claims 900 million users, or 13 percent of all human beings alive. It does actually make money, unlike a great many Tech Bubble 1.0 companies. It will likely survive the eventual Techpocalypse, just as Amazon.com, Google and others did.

“What's happening now is nothing like the insanity that gripped the market in 1999,” CNBC shouty man Jim Cramer yelled recently, and he's probably right. Cramer's track record of accuracy is only slightly lower than the success rate of Sex Panther: Fifty percent of the time, Cramer is right every time!

But with all due respect to Jim Cramer, there are lots of red flags about this company, snapping crisply in plain sight.

• Its revenue growth is slowing.
• It hasn't quite figured out how this whole "cell phone" thing works yet.
• Advertisers aren't too sure they can make money buying ads on Facebook, the New York Times writes. One, General Motors, has already pulled its ads.
• Insiders will be dumping shares in an unusually big way at the IPO. Some 57 percent of the shares that will be available to the public will come from investors who bought the company early and are cashing in on the IPO, writes the Wall Street Journal -- a high percentage for any IPO, particularly for a tech IPO.

And yet these red flags are only serving to enrage the fury of investors wanting to buy more of the stock, which apparently also has about 900 million interested buyers. This lack of caution in the face of all evidence is maybe the biggest hallmark of a bubble.

The New Yorker's John Cassidy, author of the Tech Bubble 1.0 autopsy Dot.Con: The Greatest Story Ever Sold, is going with tech bubble. He suggests that, while the company may survive and thrive, just as several dot-coms survived the first bubble, investors must be on some high-grade hopium to give it a valuation of $100 billion (and possibly more, after tomorrow's trading): "In purchasing its stock, as with buying the original dot-com stocks, investors will be laying out their cash primarily on the basis of hope and optimism rather than a clearly defined and firmly established business plan. To me, at least, that has echoes of the past."

PC Magazine's John Dvorak also decides that the true measure of the bubbliness of the Facebook IPO will be its legacy -- how many copycats rush to market, chased by investors looking for the next hot thing. He believes a successful Facebook launch means "the floodgates of bored money will pour into every idea that can put together an offering of any sort. It is 1999 again."

But Dvorak also warns the bubble could keep swelling for years to come: "We often forget that the Netscape IPO, which helped trigger the dot-com bubble, was in 1995—the very beginning of a five-year ramp. If Facebook triggers a similar bubble, then it will burst in 2017."

Comments

[Xenothanes]

12:34 PM on 07/14/2012

FB‎ - Facebook Inc (NASDAQ)‎ 30.72 -0.09‎ (-0.29%‎)

Die.

[Mike Keohane]

12:31 AM on 05/21/2012

Microsoft purchased 1.6% of Facebook for $240M a few months ago, implying a Facebook market capitalization of $15B. Now the Facebook capitalization is $100B? A child could figure this out. No good will come from this.

[Joseph LeCompte]

06:10 PM on 05/19/2012

How many servers does FB need for all those users? That is FB #1 issue.

[tgwrh]

10:05 AM on 05/19/2012

FB is overpriced by double.

[Adil Siddique]

06:17 AM on 05/19/2012

Check This Out Guy's! http://www.techbread.net/2012/05/facebook-winners.html

[urownexperience]

05:39 PM on 05/18/2012

Are you a small day trader? Bwahahahahahahaha

[whitcombc]

03:24 PM on 05/18/2012

On Wall St, the memories are short and the wallets are huge. This is like gambling but without the cash actually being used. You buy 100,000 shares at $38 a share ON MARGIN because you already have an account with Chase or Citi or Fidelity or TDAmeritrade worth over $10 million. Then you watch until the shares go up to say $43 a share and you sell everything. You put down 10% of the $3,800,000 ($380,000) and you sold with an increase of $5 a share. You made $500,000 profit. Your sale prompted a sell off and now the price is $35 a share so you do it again. You buy which pushes the stock up to $45 a share. You put up $350,000 to buy $3.5 Million worth of stock. When it is at $45 you sell collecting $10 per share ($1,000,000) and in two trades you made $1.5 MILLION without ever having your actual money at risk the way normal people do. I can't do it - it takes 3 days for a trade to clear for normal people and longer for a margin trade. The big guys can easily trade 10-20 times a day. The days of requiring sheets of paper - the actual stock certificates - is gone for these guys. It's all via computer. We have created some really sick systems in the name of progress.

[ritamary]

10:34 AM on 05/19/2012

Thanks for the info. Well everything is made so easy for the 1%, isn't it? For the rest of us, not so much...

[delmonico99]

12:09 PM on 05/20/2012

Except for the fact that, in order to be able to pull off the above scenario, some chump must be willing to buy those shares from him at the highs and sell at the lows. Do you really think its all that simple? Plus, all this buying and selling brings with it taxation at the highest marginal rate (not the infamous 15% cap gains rate which one needs to wait 1 year to sell)

[RunningBecky]

03:09 PM on 05/18/2012

My personal, non-expert, non-insider opinion on the Facebook IPO insanity. This is very funny.
Huggs Becky

[JoeBlough]

02:46 PM on 05/18/2012

How much will the government be on the hook for?

[Mike Keohane]

12:44 AM on 05/21/2012

Lots. The Banks have to do something with all the "liquidity" (taxpayers money) the government's been pumping into the system since 2008. This is the money the Banks can't lend to real businesses because it's just too risky to do that.

[Kirtley]

01:12 PM on 05/18/2012

If you're looking for bubbles, the financial sector seems more likely to me. The bailout(s) stopped that sector from fully deflating last time.

[castlemike]

12:57 PM on 05/18/2012

http://www.zerohedge.com/news/think-you-bought-facebook-think-again

Think You Bought (Or Sold) FaceBook? Think Again

If you just submitted an order to buy FB today, and were confident the order was executed even if at market, you may be out of luck:

NASDAQ HAS PROBLEM DELIVERING FACEBOOK TRADE EXECUTION MESSAGES

What this means is that the exchange at this point is deciding whether or not to send back late executions to all people who bought, or thought they bought.

Needless to say this means that the indicated price is likely not the real price if one factors for all the latent orders, on both the bid and offer side, unless of course all those orders get cancelled, further eroding confident in the market, only this time hitting that one segment most disenchanted with the stock market - mom and pop.

[KarmaPatrol]

12:40 PM on 05/18/2012

That's why tech and other growth stocks can be risky (google Green Mountain Roasters stock price). You pays your moneys and takes your chances, .... only for a small part of my portfolio. More of a value investor, though reading Nassim Taleb on general money philosophy

[RhiannonRings]

12:29 PM on 05/18/2012

What are your thoughts on the site, Zero Hedge? Lots on talk about the IPO on it today...

[Tom Hendricks]

12:17 PM on 05/18/2012

Set up a bubble burst watch for online books too. First there's a price fixing scandal among the major players, then there is excess reader machines, add to that huge book advances for books written by major politicians as a sort of influence buying, and combine this with a really limited group of readers to purchase all this.
Burst that bubble, book prices come down, the online book biz shrinks to a realistic size again, and publishers stop buying off politicians with big book advances.

[JADJAD]

11:39 AM on 05/18/2012

As a very early user of the Internet, I started with AOL. As the technology matured and the commercial value began to grow, my first move was to a local Internet provider who's primary business was banking but had enough band width to accomidate the new service. My next step was to dump AOL and use Netscape and find content on my own. To some degree, Facebook is the AOL of today. In one location, you have all the social connections that you need. There is one exception. With AOL, you did pay a monthly fee for service. Whether it will be copy cat's or just boredom, I don't see the IPO as a winner for anyone other than the initial investors or the professional trader.