As readers of Hedgephone know, I have long argued that Wall Street's last and greatest bubble was going to pop somewhere around the time that Facebook (NASDAQ:FB) goes public. The reasoning was that the web 2.0 bubble is almost as vile and deplorable as the 1999 technology bubble. Most investors don't have the type of long-term memories to avoid the pitfalls and bear-traps of investing in the latest growth idea.
Call me crazy, misguided, out of touch, behind the times, or whatever you like, but the bottom line is that investment bankers on Wall Street receive some of their largest underwriting fees from tech bubble IPO banking. Once the Facebook deal is unleashed on the investing public, the bubble will be so large and ominous that the relative mouse-click and eyeballs valuation game might end violently with a loud Hindenburg pop.
While investment bankers are supposed to be a respectable bunch who provide growth capital to innovative businesses, these guys also have an inherent conflict of interest and are looking for huge payouts with little regard to the small investor who buys into the frenzied hype that these IPO's create. Additionally, many bankers on Wall Street are simply A-moral as opposed to immoral and could care less about the valuations they come up with using their pro-forma models - which really only have a use in a class room or sales floor setting.
Aside from EBITDA guesstimations, web traffic hype and buzzwords, the profession is arguably a tax on the rest of society in today's marketplace. These bankers don't create anything, produce anything, or provide value for anyone besides themselves and the corporate insiders they represent. True, bankers historically have done a lot of good work in fields like mergers and acquisitions, lending money, storing wealth, etc... but pushing overvalued paper onto unsuspecting suckers is the main reason many Americans detest them.
Of course, the regulators never focus on investment banks, but instead go after the competition of the investment banks for whatever reason (cough..Corruption...cough). There are many IPO's with questionable valuations to mention such as LinkedIn (LNKD), Zillow (Z), Groupon (GRPN), and others, but I want to focus on one of the worst offenders in particular.
Angie's List (ANGI): While this company certainly creates a ton of value for certain small business owners and generally does a great job helping consumers connect with small businesses, the stock seems like a totally raw deal for shareholders. Angie's may be the first you check with when hiring a contractor, but the company isn't one you should invest in, given the company is losing around $50MM per year (2011 losses were 49MM) on the bottom line. I am all for the "freemium" internet lemonade stand business model, but at some point any lemonade stand that loses $50MM a year will likely be shut down by bewildered parents.
Most value investors don't look for stocks with a negative 811% return on equity, a price to book multiple of 19X, or a negative 54% operating margin. Investment bankers, on the other hand, love this kind of thing because it means there are plenty of sheep out there ready to be fleeced. Sure, the company has around $45MM left to run t.v. commercials, etc... and it may eventually monetize its relatively high Alexa.com ranking of 3,500, but there is no way I would advise anyone to pay $870MM for this business. In fact, if you aren't scared of shorting stocks, take a long hard look at Angie's.
As for Facebook, I am not saying that the stock will necessarily be overvalued, although it seems it could be priced that way very soon - what I am saying is that Wall Street has a huge incentive to make the investment community "believe" in web 2.0, because the higher the valuations of the bubble, the higher the fees these bankers earn from selling potentially worthless paper to unsuspecting investors.