Since Facebook's (NASDAQ:FB) long anticipated S1 was filed on February 1st, pundits have been coming out in droves weighing in on everything from Facebook's revenue growth to the number of hooded sweatshirts hanging in Zuckerberg's closet. I haven't heard this many opinions being expressed since my daughter learned how to speak.
I've read everything from, "Undervalued" to "Facebook will save California's economy and resuscitate the IPO market" to "Facebook's IPO marks the end of private markets" to "Overhyped and Overvalued". The viewpoints are limitless; unfortunately, the same cannot be said about opportunity. I thought it was time to step out and make sense of all of this mayhem before too many heads explode and too many opportunities are lost.
Firstly, I find it amusing that the more the skeptics cry "bubble" and attempt to remind us of Pets.com, the higher the price Facebook's shares climb in the private markets. Overvalued? Really? Did I miss something? Have stocks suddenly started trading on fundamentals again? Perhaps I was too busy updating my Facebook status to notice the widespread return to the old fashion investment principles of investing in businesses rather than tickers.
Like nearly every publicly-traded company, Facebook's fundamentals are inconsequential. I can't understand why analysts are even bothering to waste their time dissecting every last number in the filing (starting with the 1 in the S1) when they should be paying more attention to the big picture.
Here's the big picture…
Anyone who thinks Facebook is overvalued must not have heard of the "Cousin Cara Factor", named after my cousin Cara. Cousin Cara (I call her that because that is her name) has never bought a stock in her life. Although she can build a damn fine looking virtual farm, I don't think she could differentiate between a stock and a sock. In fact, I remember once telling her that I needed to hang up the phone because the market was crashing. To which she replied, "Someone is crashing into the market! Where am I going to buy my beefsteak tomatoes tomorrow?"
Yet lo and behold, Cousin Cara called two weeks ago inquiring how she can buy shares of Facebook. Now just imagine 845 million cousin Caras clamoring for shares. If that seems farfetched, visualize just 15% of Facebook's user base bidding for just 1 share each - that still equates to over 126 million Caras controlling over $5 billion worth of demand - a little more than the entire float. We are in unchartered territory here. Never before has a company with this much global influence and consumer fascination penetrated the public markets. Consequently, Facebook possesses one asset that distinguishes it from virtually every other company on the planet: built-in aftermarket support. It reminds me of a joke that I don't find very funny:
"How many brokers does it take to sell Facebook shares?" --- "None, but that doesn't stop 20 of them from getting in between a buyer and a seller and killing a transaction."
Will Facebook ignite the IPO market? Perhaps. Will it resuscitate it? No.
In order for our IPO market to thrive once more it would require the implementation of a functional aftermarket support system. Without a mass influx of companies with significant investor reach and embedded support platforms going public, we would need to see the resurgence of smaller broker dealers, analysts and market makers getting behind lesser known names. The likelihood of BDs backing smaller cap companies with penny trading spreads? Nil. The odds of a hundred more Facebooks filing to go public in the near future? Less than nil.
Without sufficient aftermarket support there will be no small cap IPO renaissance to save our economy during this era of unrivaled innovation. Our only savior is the Private Company Marketplace (PCM) where high growth companies with enticing spreads already exist. Those who are calling this the end of the private markets are about as visionary as a bean counter - no offense to bean counters, you once served a great purpose before calculators were invented. Wake up, people. This is not the end of the private markets. This is just the beginning.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.