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Facebook IPO: Just Don't

 May 07, 2012 12:16 PM


(By Karl Denninger) Want to lose money?  Buy Facebook's IPO and hold onto it.

This is not to say that there might not be some decent day-trading or short-term opportunities in the stock, as I'm sure there will be.  Anything volatile has the opportunity to make money embedded in the price swings.

But that's not the question -- the question is whether at 99 times earnings there's inherent value in what amounts to a fad company selling advertising to people who hang around posting pictures of themselves doing beer bongs.

In a word: No.

Never mind that the world is increasingly going mobile and the mobile world is inherently intolerant of advertising.  It's not just the form factor of mobile devices, although that certainly enters into it -- when you get a tiny little sliver of the bottom or top of a screen, you can't sell much (and thus the marketing is not worth much on the price side.)

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It's also the fact that data plans are usage sensitive, and therefore the user is paying for the delivery of the advertising that he is then forced to consume.

This is a bankrupt business model that will eventually collapse inward on itself.  It might not happen immediately, but the more "multimedia" one makes advertising the more bandwidth consumptive it is, and this will soon wind up running into the people's perception (and reality) that they're paying for the delivery of the ad that is disrupting their experience.

There's no way around this convergence problem, and thus the company ultimately will go nowhere.  Oh sure, you can build a company for a while on hype and hope, but ultimately what you have to do is deliver cash flow back to shareholders, as the only long term value that a company has is its discounted cash flow returned to shareholders in the form of dividends.

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That's "zero" for the foreseeable future on Facebook and therefore the wise man will stay away from the Wall Street 1999 Hype Machine.

After all, it's not 1999.

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