Sometimes it’s the free fall that kills you

I’ve been banging on recently about pending mean reversions in the price of many assets.
In today’s news, it’s Facebook’s (Meta) turn.

They reported poor quarterly earnings and the stock has fallen 23% in after-market trading.It’s going to erase some serious market capitalisation.

It’ll be wiping out the same amount as the combined sharemarket value of ANZ Bank, National Australia Bank, Westpac Bank, Wesfarmers and Telstra.

Facebook’s stock price is well on its way to a long term mean reversion.

In my charts (see below), I use a 200 week moving average. I want to reiterate, this is a 4 year rolling mean. 

I’m not rejoicing the decline but I’m highlighting that when managing investment portfolios, ‘alpha’ can be strangely achieved by not owning assets which are overpriced or perilously stretched.

As I don’t short stocks, telling people when to stay away doesn’t show up in any performance reports.

Some of my reminders and prompts have included;

My January 21 newsletter showed many charts of stocks who have already been crunched.

The December 28 newsletter highlighted the distortion the FAANGM stocks are creating within the S&P 500.

On January 26, 2022, an extract from this note

said, “Meanwhile, the other three of the “FAANGM’s gang, being Netflix, Amazon and Facebook have already broken below their corresponding (or sympathetic) support lines.”

February 3, 2022

by Rob Zdravevski

Facebook vs. Airbnb – Comparing IPO’s

Facebook’s IPO in May 2012 was a big event.
As a private company, it raised $1 billion.

At the IPO, FB sold $16 billion worth of shares of which the company kept $6.8bn. The rest went to expenses, brokers and selling shareholders.

FB’s IPO market cap was $104 billion. For 2012, FB produced $5 billion in revenue and net profit of $1.3 billion.

AirBnb has raised $6 billion cash as a private company and it’ll “raise” $2 billion at the IPO (don’t yet know how much the company keeps – see selling shareholders).

It’s market cap at IPO will be $35 billion.

AirBnB has $5 billion revenue although it’s not profitable yet. That doesn’t matter ’cause the market these days is only paying for multiples on revenue.

Facebook’s stock price halved soon after the IPO to reach a low of $17.55 per share. Since then, it has risen to a price of $272 per share and boasts a market cap of $777 billion.

Comparatively to other recent “tech” IPO’s, Facebook’s value saw the majority of its appreciation as a public company.

Inversely, AirBnB has raised a lot of money as a private company at ever escalating valuations, so I say be careful being the absorbing buyer of the selling shareholder, however this stock could be a real crackerjack.

Incidentally, AirBnb, Uber etc etc are not “tech” companies.

Homonym of the month – Utility

I have just read an interesting article by Justin Fox of the Harvard Business Review that discussed the “utility” of dominating technology companies. The article commenced with the innuendo of the word “utility” suggesting its connection to power, water and telephone companies, while later it shifts its use of the word to something can offer a broad use to the population.

A utility could also be person, often a sportsperson, who has skills that are handy and can be attributed to a range of roles that they are asked to perform.

Some dictionary definitions of utility include the state of being useful, beneficial, able to perform several functions (a utility truck), an economic term referring to the total satisfaction received from consuming a good or service, utility clothing that is functional rather than attractive (there’s a market opportunity) or something useful or designed for use.

The keywords that I extract from this paragraph of selected definitions are “broad” & “useful”.

My definition, in an economic sense is: To have a choice of using a service or product that provides the broadest utility to many people for the lowest possible cost.

Does Facebook or Twitter provide utility? Well, Yes, according to my definition.

Do telephone companies or electricity utilities provide “utility”? Yes, but I’m not entirely sure.

Depending where you live, you may not have a choice of which electricity company you can use and as a result they don’t need to offer the lowest possible cost.

I wonder if a company does provide a broad utility to many people, does it then become a monopoly and the sheer goodness, genius or effectiveness of providing my type of “utility” is ultimately regulated.

The words regulation and “lowest cost” just don’t seem comfortable occupying the same sentence.

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