Bartiromo: Fund manager bet against Facebook and won
— -- Facebook has dominated the talk on Wall Street since going public on May 18. But after the hype and excitement surrounding the $100 billion deal, the chatter has been for all the wrong reasons. The stock plummeted from its offering price of $38 a share. Technical glitches, overvaluation and questions about the business model created disarray and confusion. Former star technology analyst turned investor Dan Niles expected all that. Today he is among the happiest Facebook investors because he bet against the company. I caught up with the manager of the AlphaOne Capital Partners $100 billion-plus fund to find out how he knew to stay away. Our interview follows, edited for clarity and length.
Q: I'm calling you the happiest Facebook investor because you made a bet against this stock.
A. That's probably true.
Q: Why did you short the stock at the highest level, and how did you know not to buy?
A: I shorted it the moment it opened for trading at $42 dollars a share. If you look at Facebook, the good news is you had a very public comparable company with a lot of the same issues and good things going on, which is Google.
To some extent, it's like two houses on the same block, and one house, which is Google, you say, "Oh, that house is appreciating at 24%, and revenues were growing 24% year-over-year in the most recent quarter." Then you look at Facebook and say, "This house is maybe twice as big. In this case, their growth rate was 45%. OK, that makes sense. Maybe I should pay twice as much for it." But you look at Google, and investors were valuing it at roughly six times annualized revenues; and you look at Facebook, and despite it growing at 45% vs. Google at 24%, they valued it at about 24 times if it goes public at $38.
Secondly, they reported on April 23 how revenue growth was declining. On May 10, they pointed out that growth in their users was growing faster than the amount of money they were generating off of them. Immediately, they were signaling that Q2 prospects were going to be a little weaker, and a lot of this is due to the growth in mobile users.
Q: Why is the mobile piece of this so important?
A: About half the people access Facebook through their cellphones, and advertisers just don't pay as much to advertise on a piece of display that's a couple of inches by a couple of inches vs. on your PC. They're having trouble making money off of that.
The final piece was (General Motors), the day before the IPO, said, "We don't see the benefits of advertising on Facebook, so, we're pulling out." You had a lot of warning signs that business was slowing further. They're having to deal with the fact that when you move into emerging markets, they just don't spend as much on advertising.
Combine all of that, and you can get into the characteristics of the deal where the underwriters increased the size of the deal, over half of the sellers were selling shareholders, and to me, this looked like a recipe for disaster, and that's why we shorted at the open.
Q: Valuation and fundamentals — it was too expensive, priced too high and the business is slowing.
A: Yes, because if you have two houses in the same neighborhood, one house is twice as big, but they want to sell it to you for four times as much, that doesn't make much sense. But if they're willing to sell you that house that's twice as big for the same price as the first house, you go, "Oh, wow. That's a great deal."
Q: How much lower will it go? Do you think the decline continues?
A: I don't see why not. We covered our short fairly recently because it's getting added to a lot of indexes just because of the size of the company. Its a $73 billion market valuation, so it's getting added to different indices (so money managers who mimic those indexes will be forced to buy it.) That will create some support.
It got added to the MSCI index at the end of last month, and it's getting added to some Russell indices. That, in and of itself, should lend it some support. But the problem is even at (the June 11 close of $27.01), it's still trading at about 17 times annualized revenues. I have said I would not be surprised to see it go to $20.
Q: What else is happening in technology these days?
A: You're going to need to go through a reset in terms of growth, because everybody is aware that China growth has been slowing.
In addition, Europe is definitely slowing, and the question there is how bad it's going to be. In the U.S., we've seen unemployment continuing to tick up. The problem with technology companies is these companies get a fair bit of their revenues from overseas, and the fastest-growing piece of their revenues is from overseas. You have to struggle with the earnings estimates that people are carrying for most of these technology companies, (which) are probably too high.
There's still a lot of exciting things going on. The shift to mobile, whether you're talking tablets or smartphones, is a really big deal. I'm sure most of the people reading this are spending a lot more time, whether on their smartphone or tablet, looking at things, relative to spending time on their portable computer or their desktop.
Q: Do you see catalysts on the horizon for technology this year?
A: This year, I'm pretty bearish, and I have been, because people were overestimating the growth.
If you look at the PC industry, for example, I'm very bullish on Microsoft on the other side of them launching Windows 8 later this year. It is the biggest innovation that we've really had since Windows '95. You'll be able to touch your screen, much like you do with your cellphone screens. That's going to kick-start computing again.
The problem is, why would you buy a portable in front of this? It doesn't have the hardware capabilities yet.
I see this as a big positive for the PC industry, but it's probably more of a next-year type of event because the initial launch is pretty limited. It will probably stall demand in front of it.
Q: What about overall investing? How are you investing these days?
A: The spaces that we're interested in are more on the content side — the media companies like Disney, because the business model is changing. Earlier, if you had content, the problem was, how did you get it to people? The choices were fairly limited. But the biggest innovation now is the Internet, and you have multiple channels, so you've got real distribution. The content now is becoming much more valuable, because there's a lot of ways you can distribute things.
We are looking at some of the other media companies, like a Lionsgate or Time Warner. You have to find something that people actually want to watch, and will pay up for it.
We're thinking about long-term investments as we get towards the end of the year. We think stocks can go down another 10% to 20% potentially, so we're trying to figure out how to be more defensive in our position.
Q: You're expecting that we'll see a market decline this year?
A: I'm expecting the market to go down further. The big thing is Europe.
I don't think people fully have appreciated how ugly this can get. Over the last two years, we were dealing with countries in Europe that weren't that significant in terms of global GDP. Greece or Ireland or Portugal, these are small countries.
But you add them together, it's about $700 billion in GDP between them. Spain by itself is at $1.4 trillion in GDP, the 12th-largest economy in the world. Italy's borrowing costs have now gone over 6%. They're No. 8 in the world in GDP, with an economy size of $2.1 trillion.
You've moved from countries that didn't really matter from a global demand standpoint to countries that are really big. If things don't get solved, it could be quite damaging. .
Q: What should we do with our money?
A: People are underestimating the value of cash. There's this old saying, which is you can get money when you don't need it, but when you absolutely need it, you can't get it. Anybody who was trying to refinance their house or get a loan in 2008 can attest to that. At this point, you know the following. You know China's growth is slowing. You know the U.S. economy is also slowing. You have almost half the economies in Europe in recession. Why would you want to buy stocks hoping they go up? For me, all I know is that business is getting worse. I'd rather sit on the sidelines, have some capital on hand.