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Facebook's Pointless IPO Fear
By: Covestor.com   Monday, May 14, 2012 9:27 AM
Symbols: GOOG, INTU, RIMM
And self-importance is a common characteristic of technology CEOs, quite a few of whom are no longer CEOs, and not because they didn't "make the quarter." Scott McNealy of Sun Microsystems, Ken Olsen of Digital Equipment, and Messrs. Balsillie and Lazaridis of Research in Motion are just four former tech titans, brought low not because they didn't play Wall Street's ‘games,' but simply because their firms' products attracted fewer and fewer buyers.

Here's the secret to running a public company, Mark: communication and execution. Describe what you plan to do and how you're going to do it. Tell us what your business model is and how it differs from others'. Make your best projection on what you plan to spend. Then execute on those plans and the opportunities in front of you.

The truth is: great long term performance, where you achieve all your and your company's goals, is nothing but…a series of great short-term performances. Feel free to lose money in a quarter, if that is the way forward. Feel free to make a transformative acquisition that requires all your available cash, so long as you mentioned previously that it was a possibility. Feel free to accelerate your capital spending plans, if per your prior quarterly comments you noted an rising competitive threat. If you keep your investors informed of your plans, and then largely execute upon them, then you have nothing to fear from the great Wall Street analyst hydra.

Think I'm kidding? Look at Intuit (INTU), a public company since 1993. Look at a chart of INTU's share price, which, as we say here on Wall Street, has consistently gone, "up and to the right." Now consider that in Intuit's early days, including for years after going public, the company lost money in one or even two of its quarters, EVERY YEAR. Heavens! They LOST money! Gah! Circle the wagons! Issue a news release!

But Intuit didn't have anything to fear. First and most important, Intuit's tax and accounting products progressively found more and more customers. And second, the company's leaders, including founder Bill Campbell and long-time CEO Scott Cook consistently explained the seasonality in their business (tax software, go figure) and how revenues might rise and fall, but expenses were more constant: hence the money-losing quarters. Meanwhile Intuit bought and sold companies, hired and fired people and generally just got on with it. $2 invested in INTU in 1993 is now worth $56.

Facebook can enjoy a similar ride, provided it follows the same path as Intuit: communicate and execute, each and every quarter. But fail to do either, or worse, both and the outcome will be less pleasant.

Open wide (your plans) - this won't hurt a bit.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.


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