Facebook is the new Greece

9th February 2012

Mark Zuckerberg's baby – expected to valued at up to £100bn when it comes to market in the spring – could be the catalyst that brings down the social media sector in the same way that the ever continuing Greek crisis has exposed the underlying weaknesses of the eurozone.

Bearish investors have taken up huge short positions in stocks such as Groupon, Zynga, Linkedin and the off exchange trading in the pre-IPO Facebook, failing to be put off – or possibly encouraged by – new highs in the Nasdaq Composite Index with its heavy weighting towards technology.

Investors who short shares expect the values to fall – they will net the difference between the price they paid for the stock and the lower value when they close their positions.  In general, they can short shares either through derivatives such as options or by borrowing stock for a fee from a shareholder and then returning them later. Some markets have restrictions on shorting.

According to the Financial Times, short positions in business social site LinkedIn amount to 5.5% of all its shares. But as its free float – the stock available to the market – is severely restricted, this amounts to some 65% of tradable shares.  It's the same with voucher supplier Groupon and gaming site Zynga – a tiny percentage of the overall capital is held by short sellers but that amounts to a huge proportion of the available capital.

The rationale behind the short positions

Just as with Greece, there are fundamental reasons why social media stocks are overvalued – as well as arguments that their present worth can be justified.

Bears base their case on:

This bearish blog with its link to an academic paper looking at the Facebook valuation talks of "bubbles" and "sky-high valuations". It questions growth assumptions – the most extreme sees 1.8bn users or about one in four people on earth when billions still have no access to electricity let alone computer-style devices.

"The fundamentals that shot social media companies to instant stardom are already fading. That doesn't bode well for future share prices," says blogger Rebecca Lipman at Kapitall Wire

Stay away – the numbers are beyond belief

The message from writer Shmulik Karpf at Seeking Alpha could hardly be clearer  – stay away. Karpf analyses published turnover and profits (or losses) of three social media stocks. He says:

Investing vs trading

At Henderson Global Investors, the technology team sees its task as investment, not short term trading so it too stays away from social media IPOs – at least until the hype works through and prices have fallen to more realistic levels.

They say " While a $100bn valuation is generating a lot of excitement and hype it remains impossible for us to form an investment opinion. This is not because we doubt the power of this stock or social media but it's only when the more prosaic aspects of  profit and loss and Balance Sheet analysis are able to be properly considered in relation to market value that any genuine investment decision be made. And we have only vague details of these at best."

The response of the social media bulls

Investors with positions in social media stock cite growing investor interest after the Facebook IPO filing with some buying into Groupon, Zinga and LinkedIn as a proxy to play Facebook – just as some bears are selling these shares as a synthetic method to sell Facebook.

A number argue that the filing will eventually show the matrix for continuing earnings growth, offering new light both on Facebook and on its rivals. Some ultra-bulls are talking of even more Facebook-like IPOs.

And others just point to the bull run in the shares. They suggest- touches of efficient markets – that the market in its wisdom has bought heavily into the social media story, adding justification and credibility to the figures.


More from Mindful Money:

Euro breakup – Have you planned ahead?

Hungary could prove more damaging to the Eurozone than Greece

Facebook IPO – Beware of the 'Hype-Cycle'

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