Thursday, 24 May 2012 09:15

Facebooking The Chinese Wall: How A Blog Has Outperformed Wall Street For 5 Yrs Featured

Wall_Streets_Chinese_Wall_copy_copy

I will be taking the gloves off and going over this gangster style on Lauren Lyster's Capital Account Show on RT, tomorrow at 4:40pm. In the meantime, let's lay some groundwork.

As those who follow me reguarly probably already know, BoomBust bests ALL of Wall Street's sell side research. For evidence of such, reference "Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?". For the quick story behind how we are able to do what the lay muppet may consider nigh impossible, reference my piece on the Practitioners Of Muppetology…

For those of you who may have not heard as of yet, Reuters Alistair Barr reported Facebook's lead underwriters Morgan StanleyJP Morgan, and Goldman Sachs, all cut their earnings forecasts – and did so in the middle of the IPO roadshow. This is a rarity and quite frankly an event that I don’t ever recall happening in the past. Adding fuel to the fire, this downgrade was disseminated only to a select few institutional clients, basically leaving the mom and pop crew (aka, MUPPETS) out to dry.

What makes this such class action fodder (see Why Shouldn't Practitioners Of Muppetology Get Swallowed In A Facebook IPO Class Action Suit?) is that sell side analysts tend to have greater access to corporate management than regular investors or even the better equipped, more experienced guys such as myself. That being the case, the analysts of the actual underwriting companies have an even better position in regards to corporate management - arguably more so than any other financial entity. So, what happens when all of the underwriting companies suddenly downgrade their forecasts simultaneously?

As per Reuters:

The change in Morgan Stanley's estimates came on the heels of a May 9 Facebook filing of an amended prospectus with the U.S. Securities and Exchange Commission, in which the company expressed caution about revenue growth due to a rapid shift by users to mobile devices. Mobile advertising to date has been less lucrative than advertising on desktops.

"This was done during the road show - I've never seen that before in 10 years," said a source at a mutual fund firm who was among those called by Morgan Stanley.

JPMorgan Chase and Goldman Sachs, which were also major underwriters on the IPO but had lesser roles than Morgan Stanley, also revised their estimates in response to Facebook's SEC filing, according to sources familiar with the situation.

Morgan Stanley said in a statement that a "significant number" of analysts in the IPO syndicate reduced estimates after Facebook's May 9 disclosure. The investment bank said its procedures complied with all "applicable regulations."

Where's a damn lawyer when you need one?  Although this has been covered rather heavily in the media, I felt I had to do it again. Why? Because the media didn't cover it properly. As a matter of fact, they missed an entire forest of fraud because of a funny looking piece of tree bark in the way. Let's look at this from the BoomBustBlog perspective, shall we.

Facebook's warning to its analysts came in the form of a revenue slowdown as more and more user move to mobile device interfaces to access Facebook, and mobile revenue has historically lagged desktop revenue in terms of volume. Okay, I get that. Yet, even without that choice bit of news, Facebook's total subscriber growth had slowed substantially! This was made clear to BoomBustBlog subscribers several times, with the first time being about a year ago!

 

 

Even if we don't consider the slowing subscriber growth (which we must) there's still the blatant and obvious risks to the weak advertising model, as clearly articulated in our subscriber forensic analysis of way over a year ago -file iconFB note final 01/11/2011, to wit from page 3:

FB_note_final_Page_03

 

Did I have a valid point 14 months ago that ALL of the underwriters and top Wall Street analysts somehow miss - again? Don't ask my conceited ass, ask General Motors nearly a year and a half later...  

Fri, May 11 2012 WSJ.com and Reuters report GM plans to stop advertising on Facebook:

General Motors Co will stop advertising on Facebook, a move that comes during the same week the social networking website is due to go public.

The U.S. automaker confirmed a report by the Wall Street Journal. A source familiar with the automaker's plans said GM's marketing executives decided Facebook's ads had little impact on consumers.

GM said it will still have Facebook pages marketing its vehicles, but it will drop use of paid ads. Anyone can create a Facebook page at no cost. GM pays no fee to Facebook for its pages, which allow the automaker to reach consumers directly.

... "In terms of Facebook specifically, while we currently do not plan to continue with advertising, we remain committed to an aggressive content strategy through all of our products and brands, as it continues to be a very effective tool for engaging with our customers," GM said.

GM spends about $40 million on its Facebook presence, but only about $10 million of that is paid to Facebook for advertising. The rest covers the creation of content and the agencies involved, The Journal said.

GM, the country's third largest advertiser behind Procter & Gamble Co and AT&T Inc, spent $1.11 billion on U.S. ads last year, according to Kantar Media, an ad-tracking firm owned by WPP PLC. About $271 million of GM's total ad spend last year was for online display and search ads excluding Facebook advertising.

And back to that topic of growth in February of 2012, via the full forensic opinion available to all subscribers here FaceBook IPO & Valuation Note Update, reference page 10 as excerpted...

FB_IPO_Analysis__Valuation_Note_Page_10

This all leads to the topic of valuation. A topic that no legal defense team for banks should want me to broach. As I stated in January of 2011, Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week! 

Reference these two pages from our February FaceBook IPO & Valuation Note Update...

 FB_IPO_Analysis__Valuation_Note_Page_06

FB_IPO_Analysis__Valuation_Note_Page_07

It would seem that Facebook Finally Faces The Fact Of BoomBustBlog Analsysis. The burning question is how did I get this so right yet ALL of those ubersmart analysts get it so wrong? Seriously, ALL of the underwriting analysts had a buy on this obviously and grossly overpriced stock - and that was before the price was increased, BEFORE the supply of stock offered from management and insiders was increased, and BEFORE Goldman decided to increase their cashout - all very negative indications that increase both stocks floated and the distance between price and fundamental valuation.

Well, here's a couple of hints... Is It Now Common Knowledge That Goldman's Investment Advice Sucks?I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks, and Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Walk Over Clients. Of course, this isn't just about Goldman. I mean, we're talking a lot of over well paid analysts! As per Reuters:

The new estimates highlighted a continued slowdown in Facebook's growth, with the banks forecasting 30.4 percent year-on-year 2012 revenue growth on average, instead of the 36.7 percent growth previously expected. In 2011, Facebook's revenue grew 87.9 percent year-on-year to $3.71 billion.

The new numbers were relayed to big investors through phone calls and conference calls, according to investors. Bank of America held a conference call on May 10 with analyst Justin Post, where the underwriter revealed the lowered estimates.

Here are the detailed figures from the four banks, according to one of the investors who received the new numbers.

Lowered full year revenue estimate for 2012

Morgan Stanley -- $4.854 bln (new)from $5.036 bln (old)

Bank of America -- $4.815 bln (new) from $5.040 bln (old)

JPMorgan -- $4.839 bln (new) from $5.044 bln (old)

Goldman Sachs -- $4.852 bln (new) from $5.169 bln (old)

Lowered estimates for second-quarter 2012

Morgan Stanley -- $1.111 bln (new) from $1.175 bln (old)

Bank of America -- $1.100 bln (new) from $1.166 bln (old)

JPMorgan -- $1.096 bln (new) from $1.182 bln (old)

Goldman Sachs -- $1.125 bln (new) from $ 1.207 bln (old)

Lowered 2013 Earnings per share estimate

Morgan Stanley -- 83 cents (new) from 88 cents

Bank of America -- 64 cents (new) from 66 cents

JPMorgan -- 66 cents (new) from 70 cents

Goldman Sachs -- 63 cents (new) from 68 cents

Hey, I'm sure it's just my imagination. After all, there's always that famed Chinese Wall Thingy, right???!!

Wall_Streets_Chinese_Wall_copy_copy

For more on how bankers climb walls, see Why Shouldn't Practitioners Of Muppetology Get Swallowed In A Facebook IPO Class Action Suit?

Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012It is strongly recommended that said subscribers download and input their own assumptions into said model! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011).

Here are the free blog posts on the topic:

  1. Shorting Federal Facebook Notes Are Not Allowed Today
  2. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
  3. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
  4. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
  5. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  6. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
  7. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
  8. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Walk Over Clients

For Those That Want To Take A Peek Inside the Professional BoomBustBlog Paywall, Here's All of My Groupon Research - MUPPETS!!!

Apple's iPad Is Losing Market Share And Profit Margin As Apple Hits All Time High 

The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?

Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!

Wall Street is Back to Paying Big Bonuses. Are You Sharing in this New Found Prosperity?

Reggie Middleton vs Goldman Sachs, part 1For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks

Blog vs. Broker, whom do you trust!

Reggie Middleton Personally Congratulates Goldman, but Questions How Much More Can Be Pulled Off

Last modified on Thursday, 24 May 2012 12:06

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