Facebook IPO Views

It is definitely the tech story of the year so far - Facebook unveil their IPO plans that most people think will value the company close to $100bn!  

Pretty impressive for a company that is only just about to turn 8 years old, especially when you consider it would be valued at around 25% of Apple (circa $420bn) after such a short time. What I find even more impressive is that this has been achieved without really having a ‘product’.  Sure, it has a great platform on which users publish their updates, but evaluating the company as a potential investment this would worry me most.  Facebook themselves note that anyone who isn’t buying advertising from them is not a customer but a producer.  An interesting paradigm shift for a company that started out and still maintains that it’s modus operandi is about connections, relationships and social engagements.  I would argue that that is no longer the case.

Facebook its an on-line advertising company.  They have 800m users that spanthe globe and encompasses pretty much every demographic on the planet.  The level of information they can offer their ‘customers’ is unrivalled ensuring that advertising dollars are expertly targeted at qualified prospects.  A brilliant business with over $1bn advertising revenues last year - but the key question for any investor has to be “is that growth sustainable in the long term?” I don’t think so.

Long Term Value?

Not that this is necessarily a great piece of advice, I am sure like many people back in 2002 when Apple was trading at $9 or so I thought it was overpriced.  I sure did.  Now 10 years later at $463 - it looks pretty good value!  But Apple have great products and many of them.  They are such a well established company with core values around simplicity, innovation and design that will continue to delight customers for years to come.  

Facebook in my view is too reliant on its ‘producers’.  Now that every user is bombarded with adverts along with the companies privacy rules - how long will it be until the tide begins to turn? How long in such a fast moving industry until users start to seek out a new entrant to the market place that isn’t so ‘commercial’?  We all remember the Microsoft backlash, some say its beginning to happen to happen to Apple.  People don’t like it when one company becomes too powerful.  Competition is healthy for every industry and the consumer instinctively understands this.  There are few barriers to entry in social media, the next Facebook is probably exiting a US Start-up accelerator right now, we just don’t know them yet.

On the flip side, history also shows that the best investments are made in people and not products.  Mark Zukerberg is the Steve Jobs of his time. A focus and self-belief that is far from the norm.  He also doesn’t seem to be burdened with sentiment too much, just like Jobs which means he will generally always put the interests of his company first.  Great qualities that should bode well for the early Facebook investors.

Some analysts point to the Linkedin IPO performing worse than expected and suggest it may be a sign of the social media bubble bursting, but I don’t think so.  I don’t think Facebook will suffer the same fate.  I think the IPO is happening at the right time for the company and the people who get in early will make some money over the next couple of years.  Ad revenues will continue to grow as Facebook morphs from a liberal tool to one big advertising superstore but that will only last so long before the tide turns in favour of the next big thing.  If there is to be long term growth, Facebook will have to diversify outside of its comfort zone in the same way Apple had to and reduce its reliance on having its product made by 800m unpaid workers.

New Web Business Paradigm

Irrespective of who you are in the tech community, everyone dreams of launching the next Google, Twitter or Facebook.  But each of these businesses follows a relatively traditional start up model:

1. Bunch of tech guys with an idea, develop something neat,
2. They develop a prototype with little or no concern for revenue,
3. Raise some first round funding for a West Coast US Pension fund,
4. Launch a low key Beta version,
5. Rapidly grow a global user base, sometimes overnight,
6. Receive offers of 10x $M from bigger Pension Funds,
7. Start to think about revene/break even/investor ROI/commercial team development.
8. Lead the market in their newly developed field, buying up the ‘me-too’ smaller companies as little more than snack food.

Pretty smart and well developed model which has been proven many times over the past decade.  So, how do you improve upon the perfect business model?

The New Paradigm

Although not fully formed and based on my own observations only (which means it could be seriously flawed (your thoughts welcomed as always) a new model could be emerging that further de-risks the establishment of significant tech businesses based on the emergence of Social Media.

I saw a blog post by a renowned young entrepreneur with a lot of business opportunities on his plate.  His post outlined a rough business idea he had thought of but didn’t want to pursue because he didn’t have the time.  His proposition requested feedback from his loyal blog readers.  They, at his request, picked the idea to pieces, trying hard to find flaws resulting in him responding to the numerous challenges.  The Result was a fully formed business proposition which a significant group of prospective customers have played a part in forming.

Market research, business planning, test customers - complete.

Minimal time and £0 invested.

So far so good. Having developed the idea, the next stage was to generate a buzz and gauge potential demand to scale the product. To do this the entrepreneur offered anyone in the world an equity share in the business, yeah you got it - ANYONE.  To do this he asked for one simple favour in return.  They re tweeted a message from him between certain hours in a specified day.  10% of the total business was available to share amongst the people who re-tweeted the message. Those like me, who missed the opportunity by a matter of hours got nothing. 

Trending on Twitter, on-line buzz, market awareness & product anticipation

Minimal time and £0 invested to date.

So the proposition has been validated, the product promoters are driven by the thousands who share a stake in the new venture and a pipeline of qualified prospects wait eagerly to buy the product/service.  Despite the best possible market conditions in which to launch a new venture one thing is still missing - the product.  It doesn’t exist. No-one has spent a penny.  

In this case, the offering was a relatively simple service and has since been launched. Probably it only took a few weeks to move from development to deployment and when it did I suspect it has done pretty well. 

This was achieved with almost no risk other than time until the business opportunity, revenue model, management team, marketing strategy was securely in place.

A great idea, a great new paradigm and hopefully the blue-print for the next generation of bedroom entrepreneurs.

Mortgage Market Pain eases

Northern Rock have recently introduced 90% mortgages again to a mixed reaction from the investment and retail communities.

For a first time buyer the news must be welcomed, not because the rates are particularly good but because the there is no arrangement fee.  What a bonus that is. As well as scratching around to find 10% deposit, legal fees and possibly stamp duty the last thing a first time buyer wants is a £1,499 arrangement fee - what exactly merits that sort of fee?! 

On the flip side to all the positivity is those that feel this is the first step back to the old days of over-lending and bakers extreme bonuses. Its understandable that people are fearful, as a UK tax payer I am as aware of anyone how important it is that our nationalised banks get back into the black.  

However, on the whole with banks making profits (RBS aside, although they are going in the right direction) I think Northern Rock have an important role to play in stimulating the market again.  

Verdict

This move is a small step in the right direction towards our banks making more money by returning to their core volume business of lending and eventually returning that profit back to the tax payers and offering the government the opportunity to exit.  With a bit of luck other lenders will follow and reduce or remove the ridiculous arrangement fees they place to further distort the market. 

BP, RBS and BA - Q3 Update

BP

So call it beginners luck or whatever but my original prediction that BP would hit the 500p mark was pretty much spot on (close today at 505p).  I don’t think anyone ever doubted the company was still in great shape despite the Gulf Oil spill but at time of writing the article below on the matter a lot of uncertainty was evident on whether or not the permanent fix would indeed work.  Of course it did.

I think the real point here is that the price has been entirely influenced three core factors:

- High oil price has been sustained
- New management team doing a great job of keeping a low profile
- BP Oil Spill having gone almost entirely from the news (well yesterday and today aside(http://www.bbc.co.uk/news/world-us-canada-12124830)

Prediction: Short-Medium term this SP will plateau and sustain between 480-520p.

RBS
Not so good. Back in July I had hoped that the worst of things were behind them but the current SP (40p) would suggest I am totally wrong.  I am therefore resigned to holding this stock until it hits the dizzy heights of 50p+.

Prediction: 40-45p over next 3-6 months but no sign of a profitable exit for me until late this year/early next.  I think slower UK growth and continued lack of available money on the markets for home-owners and businesses will compound this.

BA

I should have had much more faith in this one (predicted a high of 220p) which burst through the 300p today.  Who would have thought after such a tough year (Icelandic Volcano, Staff Strike and Winter weather chaos) that things would have gone so well in the market.  Perhaps the estimated £50m cost of the recent winter weather was much less than expected.  I suspect the Iberian deal is where the growth in value is largely attributable to.

Prediction: I would be surprised if this one stayed as high as this for long but then I have been wrong on this one before.

Q3 report card

Up better than expected (30%) on BA, up also on BP (£1.03 a share), albeit in line with expectations and no growth on RBS.  Not likely to retire any time soon but performance to date is satisfactory.

BA post huge loss - markets happy?

Investing in the markets is certainly not an exact science, probably more of an ‘educated gamble’ and in my own case an ‘un-educated’ one but I must confess more than a little confusion as to why the markets reacted positively to the BA figures released today - the SP rose by 3%.  What confuses me is that bad news has been received so positively.  Not that I am complaining.  As a shareholder this stock has netted me on today’s value 27% return in 12 months.  So hardly surprising that I have now cashed out.

Analysts put BA losses from the Volcano distruption somewhere close to £120M and losses from the Cabin Crew strikes (technically they are still ongoing) at £150M.  BA notified the markets of £164M losses over the three months to June.  Given the previous figures this would seem pretty good news, attributed to a growth in earnings and a reduction in overall debt.

The bit that confuses me is that the markets seem to have ‘reacted’ to these losses before they were posted, perhaps it was a clever move on BA’s part who may have knowingly overestimated their forecasted losses for the quarter by some way.  Posting less than ‘expected’ losses is indeed reason to be cheerful by even I know that this SP will fluctuate wildly for the foreseeable future.

SP Verdict

I think this SP will hover between 200-220p over the next few months offering limited value for investors unless your in for the very long-term.  If it dives below 200p I will probably buy back in as I do think the management team is strong and the organisation will emerge leaner and slicker over the next 12 months.

Record losses but BP begin to climb again

No great surprises to see Tony Hayward depart as planned and BP post record losses today.  The announcement made today along with a clear-cut plan to asset sale to offset the losses was in my view a good move.  Wiping the slate clean and rebuilding the companies reputation can now begin and there was certainly no room in that plan for the current CEO.

Mr Hayward may not have been a PR ‘darling’ out of the same mould as Lord Browne, his predecessor, but he certainly had a better reputation with staff and was seen as a more approachable and open leader as well as someone who had continued to build upon the fantastic success of Lord Browne. 

Expelled

I was a little surprised to see that Mr Hayward had been offered a position with the JV in Russia - I would have thought a clean break would have suited all parties, but I imagine having worked for BP for so many years he would be reluctant to move onto something new given he may well seek to retire at 55.  Why bother?  But for me it is more about the significance of the statement, the prospect of being expelled to a minor outpost from the top job is just a little humiliating. 

The old Pension Cliche

I was however not so surprised to see every one of the major UK media using his ‘guestimated’ £600k per year pension at the core of their coverage.  This seems to be the norm now having successfully generated a wave of disgust at Fred Goodwin’s RBS pension and every outgoing CEO’s pension should now be lamented in public.  But this is not the same. RBS were a publicly owned company and BP are not.  Furthermore;

• If every CEO was given a job offer with a generous pension which they could stand to loose if something major happened on ‘their watch’ then no-one would bother to apply for the job.
• Was Mr Hayward personally responsible for the decisions that led to 11 people dying or the resulting oil spill? No.
• Should companies renege on deals made and offered to incentivise a very tough position? No.
• Have BP’s shareholders enjoyed great dividends over the past few years thanks to Mr Haywards leadership. Yes.
• Did his salary and appointment represent great value for money compared to his predecessor? Yes.
• Are the shareholders, the company owners, the ones complaining about his pension. No.

The guy has fallen on his sword which he absolutely needed to do. I am a great believer that your standard of living rises in direct relationship to your wages and future earnings.  If I get to 65 and negotiate my exit from my company only to find my pension pot is being cut I would be outraged! Just because Mr Hayward earns a lot of money is not the point, he signed a contract and delivered above expectations therefore he is entitled to his rewards.  Leave it at that.  Everything and the pension is easily affordable for BP and no-doubt linked to his quick and trouble free departure.

SP Forecast

Verdict: BP shares should find a stable bottom at 400p (416p today) over the next quarter with a final quarter rise to nearer 450p, maybe even 500p by the companies year end.  The first caveat here is that this will depend on no further oil leaking in the Gulf and the second obvious caveat is that this represents my view only, always do your own research and never invest what you can’t afford to lose.

Disruptive Banking from Metro

Apparently only 7% of UK customers switch banks because of poor interest rates or service, largely because of the perceived disruption and hassle to change.  Consequently UK customers seem to be content to put up with appalling customer service simply because they doubt that they can get better elsewhere. 

This type of enforced loyalty from Banks and inflexible approach to catering for customers may be about to change with the arrival of Metro Bank who will open their first ‘store’ in the UK on July 29th.  Brainchild of Vernon Hill II, this bank aims to shake up the big four (Lloyds, RBS, HSBC and Barclays) by offering a ‘customer focussed’ approach to banking.  Mr Hill is a successful US entrepreneur who thinks the UK public deserve better “‘It’s simply no way to treat your customers. The worst banks in the US are better than the best banks in the UK… all right it’s not quite that bad, but you know what I mean.”

Metro ‘stores’ will open 8am - 8pm 7 days a week, will offer lollipops for kids, free pens and biscuits for dogs not to mention the arrival of customer toilets in a bid to win the approval of the ‘service starved’ UK customers.  More importantly a current account can be opened in 15 minutes with customers leaving the bank with their bank card straight away.

Many people are however sceptical suggesting that it will take more than a free pen to encourage them to move to Metro a bank that has already stated they won’t be able to compete with the big four on price.  However these groups fail to see the bigger picture, Metro Bank will bring badly needed fresh competition to the marketplace and set a higher level of expectation among customers as to what level of service they are entitled to do.  The possible arrival of Virgin coupled with Tesco’s iminent arrival on the scene will further improve the situation for customers.  As expectations and competition increases so will the level of service offered by the ‘big four’ and that can only be a good thing for UK consumers.

BA AGM tough decisions, put progress all the same

The prospect of attending the AGM probably couldn’t come at a worse time for Willie Walsh (CEO) and Martin Broughton (Chairman) who currently run a battered and bruised company.  One shareholder expertly summarised the general feeling ”Profit margins are down, there’s a pension fund deficit, employees are unhappy, and shareholders are not getting dividends. Since you’ve been on the board Willie Walsh who do you think you’ve pleased? Is it time to move on?”

Add to this the many employee shareholders in attendance who took great delight in booing and hissing at most of what Walsh had to say, but especially when he stated “You have presented me through your union as Hitler and the devil. But I assure you I’ve been open, honest and truthful.”

So is it in fact all doom and gloom? Not exactly, Stikes and the worst recession since WWII can’t have been easy to deal with for anyone so it should come as little surprise that no dividents are being paid.  However, in Walsh BA has a clear leader who is clearly not affraid to take the difficult decisions needed to move the company forward that has cabin crew employee costs of sometimes twice that of its competitiors. The current business model is simply not sustainable.

Walsh is a strong charecter and is unlikely ever to be a close friend of the BASSA (the British Airways Stewards and Stewardesses Association, part of the Transport & General Workers Union) but his main problem in my view is that he lacks the right type of support from a weak chairman (Broughton) who spent most of the meeting reading a wide array of pre-prepared corporate statements which simply never really answered a question directly.  The company needs a strong leader who can offer the right level of support to the CEO and get shareholders on side.

At current price (207p) this stock is unlikely to make me much money for at least 2 years so its difficult to do anything other than stick the certificates in a drawer and forget about them. However, I am confident that Walsh has all of the credentials to see through his ambitious plan to implement the necessary changes to address the many problems the airline has and with that the companies expected return to profit (pre-tax) in the current year doesn’t seem too unlikely.

BP on the rise.

BP stocks make a significant recovery, up almost 4% to 414p this morning signalling the markets positive response to both the new cap which is anticipated to plug the leak entirely but also the news that the estimated $20bn costs associated with the clean up could actually be tax-deductable.

No-one is recommending a strong buy as yet but if like me you bought while it was still on the way down, this news and the market reaction makes the possibility of selling on at a profit a near term option.

Ghana…

Poor Ghana - played so well and had the best wishes of pretty much the whole non-Uruguay world, but that result just goes to show the very fine line between being a hero and zero……..!

BP - Time to Dive in?

BP are close to hitting the relief well and all of a sudden things seem to be looking a little better. Chinese and Russian companies with very deep pockets are hovering in the wings to buy substantial stakes……..what I would like to know is whether or not its still to soon for a shallow dive in or is it still the case of ‘trying to catch a falling knife’ i.e. just don’t do it!?