Bad Search Results

An Internet stock tumbled early
When missed earnings leaked prematurely.
It's bad to surprise,
But if profits should rise,
The stock would go up again, surely.

The stock market was gripped by a thrill of panic Thursday, when Google's 3rd quarter earnings announcement was leaked during trading hours instead of after the 4:00 PM close. However, it was not just the slip-up by $GOOG's financial printer R.R. Donnelley that roiled the market, but the news itself: a 20% fall in profits and slowing revenue growth. Like fellow internet behemoth Facebook, Google is having some challenges in building ad revenue from increasingly popular mobile usage to the extent that it has from the desktop. There is hope for the future, though; CEO Larry Page, on the earnings conference call, enthused over the "tremendous innovation in advertising, which I believe will help us monetize mobile queries more effectively than desktop today." So, $GOOG shares, which closed down 8% on the day, may soon resume their upward trend.

In the meantime, the company has built up its cash pile to $45.7 billion, an amount large enough to -

• Pay for all of the e-commerce in China during the second quarter of this year;
• Bail out Bank of America;
• Close the funding gap in the Michigan Public School Employees Retirement System.

Small consolation for an earnings disappointment.

Loss of Face in the Options Market

An Internet social sensation
Went to market with high expectation;
Before many fortnights,
The traders had bought rights
To sell it (without obligation).

The Wall Street Journal's options reporter Kaitlyn Kiernan writes that the put-call ratio on shares of Facebook turned decidedly bearish on the first day of options trading after the company's controversial IPO. Options traders bought 20.3 millions puts (the right, but not the obligation, to sell shares at a fixed "strike" price) but only 16.2 million calls (the right, but not the obligation, to buy shares at the strike price). The preponderance of puts indicates the prevailing sentiment that the price of $FB shares will continue to fall. The stock market took note, and Facebook shares slid another 9.6% to $28.84, a 24% drop from the initial public offer price of $38.

On the Down Low at the Roadshow

An analyst had a quick word
With investors his bankers preferred:
"We've cut our projections
For those with connections,
But won't tell the rest of the herd."

The fallout from the Facebook IPO continues. On Tuesday a spotlight was shown on the practice of IPO underwriters' not disclosing their analysts' estimates of companies' earnings, except to a small group of large institutional clients. Already a troubling practice, these quiet revelations appeared to skirt the letter of the law in the Facebook case. Analysts for Morgan Stanley and the other underwriters all made substantial cuts in their Facebook earnings forecasts during the pre-IPO roadshow, evidently based on information quietly provided by the still-private company. Joining Goldman Sachs in contempt for the retail "muppets" clamoring for $FB shares, the Morgans - J.P. and Stanley - have still not disclosed their estimates, as indeed they may not until 40 days after the IPO date. Reuters finance blogger Felix Salmon gives a full explanation of the issues and facts of the case, in a post that is worth the time of those who would like to gain insight into the world of stock underwriting.

A Facebook Underwriter's Confession

"Before I'd put retirees in 'em,
I've got to confess my unease in 'em;
The shares would be splendid
If they were still friended
In one or two months, just to season 'em."

Facebook has finally priced its IPO at $38 a share, valuing the social networking company at $104 billion. The global frenzy for $FB was so great in the weeks leading up to the initial pricing that US demand alone would have bought 30 times the 421 million shares on offer. Under such circumstances, a double-digit "pop" in the price is to be expected on the first day of trading, and those who did not count themselves among the fortunate few to receive allocations of IPO shares had better wait for the hysteria to die down before "liking" Facebook stock with their retirement savings.

$1 Billion Instagram

There once was a fellow named Kevin who
Built a cool photo app with no revenue;
Along came a new friend,
Who said to him: "You, friend,
Will soon have more cash than you ever knew."

Just when you thought that the social media investing world couldn't get any frothier, Facebook has whipped the market up into stiff peaks with its $1 billion buyout of a startup with no revenue. Instagram, started in October 2010 by Stanford graduates Kevin Systrom and Mike Krieger, is an iPhone app that lets users add cool, retro visual effects to their photos and share them with friends. Apple declared this free photo tool their 2011 iPhone App of the Year.

Though Instagram lacks for a top line, much less a bottom one, it has captured 30 million users in its 18-month history, as well as much of the buzz in mobile photo-sharing. This was seen as a threat by Facebook, which was somewhat slow to develop its own mobile apps, even though half of its users access Facebook on the go. With this rich acquisition, Zuckerberg & co. have taken a potentially formidable competitor in house and retained a dominant position in photo-sharing, one of the main drivers of social networking usage.

Facebook Valuation Formula

Facebook is valued at plenty
By Wall Street's high-tech cognoscenti,
Based on 1 billion friends
Times $5 each, then
Times the IPO multiple, 20.

Facebook filed its Form S-1, announcing its intention to make an initial public offering of stock in the near future; millions paused their Farmville games long enough to glean some hitherto unpublished "fun facts" about the social network, which is 28% owned by its founder, Mark Zuckerberg. Soon to be traded under the ticker symbol "FB", Facebook had 2011 revenue of $3.7 billion, a 47% operating margin and a cash balance of $3 billion. The company's social impact has been much greater, according to The Wall Street Journal:

In just eight years, Facebook has become the world's social bazaar, where friends gossip, play games and swap 250 million photos per day. It has also emerged as a potent political tool, helping to topple regimes across the Middle East last year.

Of course, there are skeptics, many of whom made their snarkiness felt on Twitter. Josh Brown, aka @ReformedBroker, suggested this risk disclosure: "Our business model may prove unsustainable if people realize how little time on earth they actually have." As for the IPO's $100 billion valuation, Wharton economist @JustinWolfers offers this formula: "Facebook valuation for dummies. 1 billion users. FB earns $5/year serving ads to each. NPV = annual profit x20. =$100b!" As they say, good ideas were meant to be stolen (thank you, Justin)!