In which Downtown takes the blame for Facebook

Facebook shareholders have watched $50 billion in valuation blown to smithereens in three months and now everyone wants to point a finger as to how that could’ve happened.  I’m willing to take the blame.

In the fable The Emperor’s New Clothes, the the clothiers of the titular ruler were repeatedly fooling their master, outfitting him in nothing but thin air and allowing him to strut about town like a peacock.  But one day, whilst he walked through the streets amid cheering throngs, naked as the day he was born, a small child innocently dared to shout out that the Emperor had no clothes on at all.  The townspeople gasped in horror at the sudden realization that their monarch was, in fact, without any clothing at all.  And then the spell was broken, what was always in plain sight suddenly became obvious to all who had conditioned themselves not to notice.

And it was game over for the Emperor.

There were several of us who felt the pricing of the IPO was absurd and the frenzy surrounding it was even more so. I dare say that we represented the small child who, with nothing invested in the storytelling of how great this deal would be.  Amidst the riotous obsession with getting a piece of it, we helped to awaken everyone to the fact that the Facebook Emperor was not clothed in any of the fundamentals that would justify a $100 billion valuation out of the gates.

I know I did my part on three important occasions:

First: My nagging doubt about the permanency of Facebook’s Web 2.0 Hegemony, led to a piece that went viral before the initial public offering. I laid out the case for why the best days for the site were probably behind the company and that even though Facebook can make a lot of money, it’s user growth that people should be more focused on. Many investors and brokers have subsequently told me that this post was a primary reason they stayed away from the offering. I’m flattered that every once in a while, my out-loud ramblings can make a difference.  The piece, from January 2nd, is here:

The Red Giant (Five Reasons Facebook Is Over) (TRB)

Second: I was live on CNBC for the pricing of the deal, the night before the company’s IPO.  Ostensibly, everyone with an interest in it was watching to see where the stock would go public.  They had me, a voice of caution and reason, juxtaposed with a brokerage firm salesman who had loaded up on the stock for retail clients and was extremely bullish. My take was that, let’s say Facebook is the greatest stock of all time, you still had time to wait and not buy on day one. I certainly don’t claim that the next morning’s lackluster open was a result of my comments, but again I’ve been told by many people that it was commentary that kept them from reacting to the hype.  “Cool out is the keyword.” The clip is here:

Third: On July 26th, the night the company reported earnings for the first time, Maria Bartiromo had me on live for a reaction. Again, I’m assuming most people with an interest in the stock were tuned in for this event. I had no position in the stock, long or short, just a fascination with it given my position as the foremost authority on Investment Fads and Themes in America. This was truly my “The Emperor Has No Clothes!” moment.  After reporting, the stock had popped on an in-line number and the initial kneejerk reaction was that Facebook was a winner after all.  Until I did this (at the 5 minute mark) and the spell was broken:

I work hard at this market commentary stuff and while I get plenty of things wrong (too bearish in the fall of 2011, gold doubter since $1200 etc), Facebook was a big one and I got it right, from very early on. And having been vocally skeptical on some pretty big stages, I truly believe I share some of the blame for Facebook’s awful debut and the suckitude ever since.

With Zuckerberg and his bankers striding down Wall Street to the blare of trumpets and the acclaim of investors around the world, someone had to call out the truth. The splendor was a mirage and our mass delusion was nothing more than a temporary spell.

I’m thankful to have been among those who helped break it.