Facebook Stock Price Decline – The Price For Not Fitting Into The Mold ?


If you are an investor – directly, or indirectly through a 401(k) or IRA – I am sure you would have followed the fortunes of FB stock . If I had to choose one word to describe it, GREED would be it. If I get one more word, I will choose STUPIDITY.

FB  was set at a high enough price at IPO  that the company was valued overnight in the vicinity of  100 Billion dollars or so of market capitalization.  At that stage – it was all about Greed on both sides. People who had stock to offload had no problems marketing an extremely good story on future earnings, and people who wanted to buy expected to buy the next GOOG at the cheap and ride it all the way to stratosphere.

At IPO – investors seemed ok with defining long term for FB as several years. But that lasted only for a little time – now long term is just the next quarter as usual. Nothing about FB changed fundamentally, except for the controversy of allegedly not sharing all the information at IPO time . FB did not have a google-like billions of dollars revenue stream at the time of IPO, and it did not have one after the IPO.  It beat analyst expectations, but still managed to spook the street with cost increases, and lower slope of growth trends.  As always – one wonders whether tail wags the dog when it comes to the street and the public companies it covers. If you understand Malayalam – കൊണ്ടുനടന്നതും നീയെ ചാപ്പാ , കൊണ്ടുപോയി കൊല്ലിച്ചതും നീയെ ചാപ്പാ – is what comes to my mind in this context.

Stocks are compared against analyst estimates to determine what price it should be traded. For an established market – analysts have sophisticated market modelling techniques. For the “social” economy, it is hard to model a financial model like a “brick and mortar” economy.  GOOG makes most of its money through adwords – and analysts like that predictability. For now, FB makes its money via ads too.  If you judge FB on same parameters as GOOG – this stock will need to be punished even more I would think, given revenue – absolute numbers and growth –  is nowhere along similar lines as GOOG.

Why would anyone advertise on FB ? The best reason I could think of is CONTEXT.  FB might provide a better way to target the right audience for a given marketing message.  And more and more people join it every day. What I particularly like about the FB audience is that there are plenty of people there at an age group that has money to spend. As the line blurs between enterprise and consumer – I would expect that FB based marketing will pick up even more steam. The big question is – when will that happen?

I had dinner with a respected analyst and consultant few days ago in the bay area. He confirmed that he spends quite a bit on GOOG adwords, but nothing on FB advertising. I have heard this from several others since FB IPO. It just shows that FB has some ways to go in communicating to its stakeholders – developers, customers, investors et al.

That is where FB is facing some challenges today. The founder CEO is an atypical executive who cannot seem to be bothered a lot about answering questions that investors have about his company’s future. He controls vast majority of shares, so his hand cannot be forced in any way at the moment.  He is a product guy – and not a bean counter type.  He has hired capable executives for all jobs other than that of CEO. A big debate these days is whether he needs to hire someone else to do the CEO job.

This whole idea of “adult supervision” is not new. AAPL tried it when Jobs thought he needed another CEO. It didnt go too well for Jobs or AAPL. But when GOOG founders tried it with bringing in Schmidt, they had good success. There are other stories too like Yahoo’s founder trying to run the company a second time and then forced out – which makes me believe that a CEO change is not the magic bullet that will make it better for FB. If Mark Zuckerberg is smart enough to build FB to where it is today on his terms, I believe he can run it too on his terms. Even if a new CEO comes in, with his controlling shares in FB – Mr Z will still call the shots. So why bother? he has a  COO  and a CFO – why not empower them even more to deal with external world, while he can focus on making the product take its next leap?

Zuckerberg plays to his user base more than his investors. I cannot find a reason to fault him for that.  He prefers jeans to suits – big deal. Does wearing a suit make him a better CEO? If FB proves to be a success, Zuckerberg would have blazed a trail for many CEOs in future to choose a path that fits them, and not the street. If FB fails, I doubt it will be in large part because of CEO’s etiquette etc.  So in my opinion, he should not worry about fitting into the mold that the corporate world expects him to.

He does have to worry about talent though. With stocks tumbling, there is a real risk of his best talent jumping ship. Even if they don’t jump ship – they might lose motivation to do as well as they have done before. It is not a start up any more – that is history. In the new world, he needs a new version of future to keep his top talent from having other plans. If anything – that will be his true test of leadership. If he keeps his focus on retaining talent, and enhancing his product – I firmly believe, the street concerns will sort out itself. The funny part of retaining talent is that he would have faced the same troubles of keeping employees if they made their big millions, and then left the company to do their own thing, or to just retire young. Darned if you do, Darned if you don’t 🙂

There is a possibility that declining stock prices might make other companies decrease their use of FB as an advertisement vehicle. I seriously doubt that would be a massive problem though. A good example is Yahoo which made a profit even when everyone seemed to write them off.  Most users of FB would not care about who owns FB, or their stock price. Those are the users that advertisers will chase – and as long as FB does not decline in users, I doubt they will run into this issue.

With lower stock prices – there might be renewed interest for another company to acquire them. A hostile take over is not going to happen the way things stand now – but if FB people wants to cash out, selling out might be a very easy route to take in the medium term.

FB did not do its IPO enough justice. The price was set higher without enough justification. Then there were the waves of initial investors getting out, with probably couple more waves to come. The sheer number of shares made available makes the problem worse. In hindsight – they could have gone public earlier, so that investors could have moved up with a wave of increased user base these past 2 years. Or they could have remained public for a little more time while they figure out a sustainable business model and a story that the external investor world can understand. I guess greed and stupidity do have a tendency to go hand in hand.

 

 

 

When Private Sector Sucks As Much As Public Sector In India


As an Indian living and working in US, I am interested in the political and economical development in both countries. In the US – since this is election season, there is a lot of rhetoric on the extreme sides of the spectrum. One side wants extreme role for government and another wants minimum possible government intervention. In India – it is different. Large government involvement is still the only agenda irrespective of political party affiliation- with privatization getting attention only since the 90s.

Pro-reform leaders like the Indian Prime Minister are all for privatization. One of the areas where there is significant privatization is in Infrastructure – specifically roads. BOT (Build,Operate,Transfer) is very popular for roads. The general idea is the government designs, and private part does building, collecting tolls for a period, and then transfer back to government.

In general – this is a good model, and I have always thought that is the only way to get India to develop faster. But I did not understand the perils of this approach till very recently. Here are 2 examples to make the point, both of which were brought out by an excellent program called “Asianet Newshour”.

BOT for roads is a scam of epic proportions in some cases. In one case – exposed by Asianet news hour – a private company just opened few other companies under different names ( using same office address)  and won contracts (probably with the required political blessings) for road contracts in Kerala. Next, they do a better version (for them , not for people) of BOT . They get money from government for part of the road, and then inflated the cost by a factor of 3 or 4. And even before roads are completed to specs – and not even putting streetlights – they have started collecting a good chunk of money as tolls. Worst case – there was an MLA on the program on TV- a guy elected by people to watch out for them – trying his best to defend the private company vehemently when he had all the facts thrown at him by rest of the panel.  Remember the 2G  scam ? this one looks to be in that league or worse.

Government had leased many farm/forest acres to private farmers in the past for cultivation, under strict norms. These farmers – including big companies that does farming of cash crops – were not supposed to change crops, sell, sublet or encroach adjacent land. Well, guess what – they did all of that and more. And the regulations are so outdated, that nothing much can be done to penalize their wrong actions. I was shocked to see a sting operation on “Asianet Newshour” that showed a communist party local leader explaining clearly the steps needed to claim acres of forest land in Kerala for private owners.  And another political leader is saying that the leased land should not be taken back by government when lease expires or when terms of lease are violated. And he will probably have his way too, given the coalition government cannot sustain without his party.

It is not that the government is doing something brilliant either.  After all these decades of winning independence from Britain – India is still not self sufficient on power. There was the largest ever power cut last week with hundreds of millions of people affected.  Most National highway stretches have 2 lanes at most.  There are plenty of restaurants that serve food that kills people or make them seiously sick. Very little is done to fix any of this with a long term perspective. Corruption is so common place that people barely complain any more. Look at Olympics – for a country with billion people – we have not even won a gold medal yet in London so far. We are still singing praises of Milkha Singh and PT Usha who came close to winning a bronze decades ago in athletics. We have no planning to make it any better next time either.

Anna Hazare had a huge fan following not that long ago. And where did he end up? He just announced his team will contest elections and reduce corruption. And at this point – hardly anyone is supporting his campaign. Why? simply because his team just bickered on every thing and could not put forward a plan that citizens of India could understand as viable.

So where does that leave India ? If neither private sector not public sector is the answer, what is the answer? is Luck the answer?

 

India in Olympics – Will The Plot Ever Change ?


In a (sick/sad) way, I am glad NBC has a delay telecasting Olympics here in the USA. As an Indian living here, I cheer happily for both countries. But the contrast between the two is way too much to ignore.

Lets start with Athletics. Every year, India sends a bunch of athletes to Olympics. There hasn’t been any success – and we still celebrate the 4th place P.T Usha got in Los Angeles in the 80s. Even before they leave India, their coaches will issue defensive statements like “even if we enter the final medal round, we should be proud of it” . Seriously? isn’t that getting old after all these years? Why bother traveling across ocean if the best you can do is nowhere close to getting a medal? If participation is the big deal – why not participate in lesser events and gain the experience?

Almost every retired athlete in India will start an academy in his or her name. Everyone wants to send their wards to Olympics, and do 4 year and 8 year plans. They then go on TV and blame the government a lot for lack of support. If the athlete who started the academy never won an Olympics, or has never coached an Olympic medal winner – what is the chance that they have it in them to do something different? If proof of the pudding is in the eating – well, lets see what comes off next week when the athletics kick off in London. I hope there will be a miracle, knowing well that hope is not a strategy.
Take badminton – where Saina Nehwal is a world class player. She seems to be doing well so far, and good luck to her. And I applaud what P Kashyap is doing too. But the doubles players were atrocious. They just did not play like a 13th ranked team in the world . There just was no intensity in their game.

Or take tennis – where the two big boys have egos fitting a soccer field. India could not field their best pair because they just hate each other. Whether the big boys Paes and Bhupathi would have won in Olympics is yet another question. I would doubt it . In Grand Slams – the top singles players in men’s circuit do not play doubles any more like Connors and McEnroe did years ago. That is not the case in Olympics – where top singles players usually play doubles too. It makes it hard for Paes and Bhupathi to win against players of Roger Federer’s class. Sania Mirza was never a top 10 player in singles, yet is the highest ranked Indian in the mix in women. Does she have a prayer in winning singles ever in Olympics? No – and I would be surprised if her teaming with Paes is going to work out very well after airing dirty laundry in public. After all the fuss – Bhupati and Boppanna who seemed confident of winning a medal, crashed out meekly in second round.

Archery was an area where we had world class competitors. They didn’t do too well either – and were totally outclassed. The lone silver lining is Narang who won a bronze yesterday for shooting. He won a bronze in an event where Bindra had a gold last year. As much as I am happy for him, can we ignore the decline?

All is not lost though – Field Hockey and Boxing are two areas I feel some confidence in. Boxing more so than Hockey. In both these cases the big difference is the difference in preparation that the teams went through. Their coaches are from outside India and they prepared the team to play to its strength. With Hockey – first match did not go well. But the second half was quite good – and I hope the team strikes back. In Boxing, the first rounds were excellent. I was surprised to see how physically fit the boxers and hockey players are now. Way to go – and good luck !

What causes this sob story to repeat each year? I can think of many reasons , but here is the first half dozen that comes to mind.

1. Politicians head sports in India invariably. Most of them have never played at a high level, and have not coached or in several cases not even followed the game. So there is hardly any vision . The one exception probably is our current sports minister who seems quite capable.

2. There is a cultural issue with taking up sports for a living. Other than cricket – most sports don’t have big sponsorship. So most parents won’t encourage kids to make a career in sports. It is changing, but way too slowly

3. Coaching is mostly stuck in the past. Past athletes who themselves were not capable of winning anything are now coaches. Bad idea – we should aim to partner with the best coaches in the world and get Indian coaches exposed to newer methods of training and conditioning. This includes boosting confidence of players

4. Infrastructure sucks in most sports centers. The only way out is to get private sector interested. Government cannot solve it themselves – and we should realize this after all these years.

5. Sports Quota from government needs to be revamped, or done away with. I personally know many who get a government job and never take part in sport ever after.

6. International exposure from young age. Don’t start sending athletes to compete abroad just the year before Olympics. Start sending them from a young age from minor leagues, and build up some bench strength.

I am glad the India – Srilanka cricket matches are there to give something to cheer about now. It is a little less gloomy thanks to that. But who knows – Miracles might happen next week.