A decline in market value of more than $10B, implying that for the $2B FB spent, they will receive hugely negative value.
Seems extreme, although it was a bad day for tech stocks anyway, so the portion of the drop attributable to the acquisition is surely smaller.
Anyway, the market seems to be communicating that not only does it think FB got bad value, but that this deal is bayesian evidence that it is being badly managed.
EDIT: I still don't think 100% of the decline is attributable to the broader market move, because TWTR and certainly KING should be more volatile than FB. But, yeah, the story might not be as clear as I thought.
I thought the article made a good point in that $2B wasn't perhaps what Occulus was worth, but how much it required in order to consider selling. FB had to pay a premium (perhaps because of its brand in the eyes of the owners of Occulus) in order to acquire the company, but it may be worth it to them anyways.
Looking at other tech stocks this seems like more of a broader downturn today. Twitter was down 7%, Zynga was down 4%, Amazon was down 3%. Correlation ≠ causation. I'm not buying the drop is from the Oculus buyout.
I think you can get a rough sense of whether this is true by using Beta (http://en.wikipedia.org/wiki/Beta_(finance)) - Beta represents the riskiness of the stock relative to the market as a whole
After a quick google it seems Facebook's beta is ~2. So a NASDAQ fall of <3.5% is an indication that something other than a general downturn impacted Facebook's price
I am no Facebook bull. But the financial logic in this article is lacking.
Facebook fell 7% in trading today. The NASDAQ fell 1.4%. So we have 3 (β=3) to 4 points (β=2) of excess losses. The author argues Facebook dragged down the NASDAQ today. Let's suffer the assumption. Using the S&P 500's 0.7% fall we see 5 to 6 points of excess losses. On a day the NASDAQ 100 Volatility Index jumped over 1 point intraday to 18 [1]. I don't smell blood yet.
Macquarie sees “no near-term financial model that will drive the $2 billion valuation.” Cross-posted below is my back-of-a-napkin work from a prior comment [2]. Development kit sales are not a perfect predictor of consumer sales. That said, they provide a snapshot of present enthusiasm for Oculus. They are also useful for forming ballpark estimates.
Oculus VR says it has sold 75 000 "development kits" [1]. It has been 1 year and 7 months since August 2012 [2], when Oculus VR began selling its development kits. Let's assume a 200% YoY 2013 growth rate - that means 56 000 kits were sold in 2013. Let's say these keep selling at the $350 the Developer Kit 2 goes for [3]. That's $20 million in 2013 revenues. Let's turn that into $2 million of profits - a 10% margin.
Let's value Oculus VR as if it were a growing perpetuity. If Facebook had a cost of capital of {10%, 20%, 30%}, Oculus VR free cash flow (FCF) would have to grow at least {10%, 20%, 30%} a year. Otherwise, its $2 billion price tag would not make sense.
Companies are not immortal. Let's value Oculus VR as a 20-year growing annuity. Setting Facebook's cost of capital at {10%, 20%, 30%}, Oculus VR's FCF would have to grow at least {45%, 58%, 71%} a year.
At lunchtime today I was listening to the "business hour" on the radio. Two analysts went back and forth about the deal, repeatedly calling Oculus "a company that makes virtual reality games". There has to be a certain % of Wall Street that has no idea what's going on at all.
I was disappointed when I heard the acquisition news, but NOT because I thought it was a bad move by Facebook.
Buying companies like this will undoubtedly come back for them and help them be a dominant force.
The problem I have with this deal is that a vision of a geek oriented, gaming-first hardware-first company that had the support and faith of the community now WILL be influenced by the vision of a company that many people do not trust.
It's not a lack of trust in Facebook for the sake of it, but from many years of repeatedly abusing the trust of their user base.
this is a poor headline. the latimes.com seems to imply causality between the two events when in fact, twitter fell 7% as well. So they could have written "Twitter falls 7% on Oculus deal"
Pretty much because investors want a quick buck. They don't want to wait until Facebook owns the internet after mobile. That's way too far away and way too uncertain.
I don't think many investors are familiar with Oculus VR. To them, facebook has just paid $2B for a company that hasn't released a product to consumers yet, and intends to make one of those headsets that were a big flop in the 1990s.
The other side of it (as you point out) is that institutional investors are generally not in it for long-term gains. If you manage a portfolio at an investment company, are hoping to get a nice bonus this year/quarter, hearing Mark Zuckerberg say he's bought a company that might take 5 - 10 years before it adds anything to Facebook is probably not very impressive.
I don't think people should attribute today's FB action to the Oculus acquisition or its price/terms. A slight negative chatter (Read: "Amateur CEO wasting money on useless toys") could easily make big momentum reversals, especially in case of a stock that mostly priced by sentiment versus intrinsic cash flows.
Disclaimer: I'm by no means disparaging momentum strategies.
While the market, in general, is probably responsible for most of this, it is an interesting question as to what investors think about this.
All of the Facebook acquisitions seem to be defensive. Even Oculus is a defensive maneuver against Google Glass, and the fact that Google is unquestionably committed to marketing Glass (see the latest pairings to attempt to market it to upscale people).
I suspect that Facebook has no idea what to do with Oculus, but it doesn't want it in the hands of Google or Microsoft.
People are making a big deal out of nothing here. The bad publicity around the acquisition (if anything) caused the share price to drop, not investors misguided confidence in virtual reality tech. Lets not confuse the two. If people were applauding the acquisition, we would be reading an article on how the share price jumped 7%.
Fluctuations happen in the market every day tech stocks are particular delicate because it can be harder to predict what is going to happen. If you look around, you'll notice Amazon dropped 3%, Twitter also dropped 7% (amongst a few others also down).
We don't know for sure that the acquisition of Oculus even caused the drop. Although, looking back on previous FB acquisitions you see a drop of investor confidence as witnessed with the Whatsapp acquisition.
When Facebook announced the $19 billion purchase of Whatsapp their share price tumbled 4.8%, once again this was a short-lived drop once the fanfare died down. Facebook know what they are doing. The fact Sony are moving into the VR space and apparently Valve are also going to be getting in on it signals this isn't a fad, this is a new-found technology arms race.
He who has the most money wins and at the moment, Facebook have a bit of money and a good network of investors behind them to propel Oculus to the top of the VR market and inevitably beat competitors on not only features but the all important price factor.
Edit: I've been down-voted. I respect that, but if you're going to down-vote my argument at least have the audacity to counteract it in the form of a reply.
I think it is unfair that you have been down voted, but I think the reason is your statement that Facebook's management knows what they are doing. I don't know if they do, but the evidence so far at least looks questionable.
[+] [-] simon_|12 years ago|reply
Seems extreme, although it was a bad day for tech stocks anyway, so the portion of the drop attributable to the acquisition is surely smaller.
Anyway, the market seems to be communicating that not only does it think FB got bad value, but that this deal is bayesian evidence that it is being badly managed.
EDIT: I still don't think 100% of the decline is attributable to the broader market move, because TWTR and certainly KING should be more volatile than FB. But, yeah, the story might not be as clear as I thought.
[+] [-] outside1234|12 years ago|reply
[+] [-] psbp|12 years ago|reply
[+] [-] harmegido|12 years ago|reply
[+] [-] melvinmt|12 years ago|reply
[+] [-] brokentone|12 years ago|reply
[+] [-] sbashyal|12 years ago|reply
http://www.forbes.com/sites/benkepes/2014/03/25/google-slash...
[+] [-] shittyanalogy|12 years ago|reply
[+] [-] badman_ting|12 years ago|reply
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] nroman|12 years ago|reply
</sarcasm>
[+] [-] joelrunyon|12 years ago|reply
</s>
[+] [-] TrainedMonkey|12 years ago|reply
[+] [-] ceph_|12 years ago|reply
[+] [-] reqres|12 years ago|reply
After a quick google it seems Facebook's beta is ~2. So a NASDAQ fall of <3.5% is an indication that something other than a general downturn impacted Facebook's price
Please correct me if my understanding is wrong
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] JumpCrisscross|12 years ago|reply
Facebook fell 7% in trading today. The NASDAQ fell 1.4%. So we have 3 (β=3) to 4 points (β=2) of excess losses. The author argues Facebook dragged down the NASDAQ today. Let's suffer the assumption. Using the S&P 500's 0.7% fall we see 5 to 6 points of excess losses. On a day the NASDAQ 100 Volatility Index jumped over 1 point intraday to 18 [1]. I don't smell blood yet.
Macquarie sees “no near-term financial model that will drive the $2 billion valuation.” Cross-posted below is my back-of-a-napkin work from a prior comment [2]. Development kit sales are not a perfect predictor of consumer sales. That said, they provide a snapshot of present enthusiasm for Oculus. They are also useful for forming ballpark estimates.
Oculus VR says it has sold 75 000 "development kits" [1]. It has been 1 year and 7 months since August 2012 [2], when Oculus VR began selling its development kits. Let's assume a 200% YoY 2013 growth rate - that means 56 000 kits were sold in 2013. Let's say these keep selling at the $350 the Developer Kit 2 goes for [3]. That's $20 million in 2013 revenues. Let's turn that into $2 million of profits - a 10% margin.
Let's value Oculus VR as if it were a growing perpetuity. If Facebook had a cost of capital of {10%, 20%, 30%}, Oculus VR free cash flow (FCF) would have to grow at least {10%, 20%, 30%} a year. Otherwise, its $2 billion price tag would not make sense.
Companies are not immortal. Let's value Oculus VR as a 20-year growing annuity. Setting Facebook's cost of capital at {10%, 20%, 30%}, Oculus VR's FCF would have to grow at least {45%, 58%, 71%} a year.
Not a bad deal.
[1] https://www.cboe.com/micro/vxn/#historical
[2] https://news.ycombinator.com/item?id=7471826
[+] [-] joezydeco|12 years ago|reply
[+] [-] WalterSear|12 years ago|reply
[+] [-] ot|12 years ago|reply
[+] [-] digz|12 years ago|reply
https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...
[+] [-] pdknsk|12 years ago|reply
https://www.google.com/finance?q=NASDAQ%3AOCLS
[+] [-] stygiansonic|12 years ago|reply
[+] [-] TrainedMonkey|12 years ago|reply
[+] [-] bobbles|12 years ago|reply
Buying companies like this will undoubtedly come back for them and help them be a dominant force.
The problem I have with this deal is that a vision of a geek oriented, gaming-first hardware-first company that had the support and faith of the community now WILL be influenced by the vision of a company that many people do not trust.
It's not a lack of trust in Facebook for the sake of it, but from many years of repeatedly abusing the trust of their user base.
[+] [-] jamesie|12 years ago|reply
[+] [-] lutorm|12 years ago|reply
[+] [-] ChrisClark|12 years ago|reply
[+] [-] jfoster|12 years ago|reply
I don't think many investors are familiar with Oculus VR. To them, facebook has just paid $2B for a company that hasn't released a product to consumers yet, and intends to make one of those headsets that were a big flop in the 1990s.
The other side of it (as you point out) is that institutional investors are generally not in it for long-term gains. If you manage a portfolio at an investment company, are hoping to get a nice bonus this year/quarter, hearing Mark Zuckerberg say he's bought a company that might take 5 - 10 years before it adds anything to Facebook is probably not very impressive.
[+] [-] fuddle|12 years ago|reply
[+] [-] ashray5|12 years ago|reply
[+] [-] gfodor|12 years ago|reply
[+] [-] bsder|12 years ago|reply
All of the Facebook acquisitions seem to be defensive. Even Oculus is a defensive maneuver against Google Glass, and the fact that Google is unquestionably committed to marketing Glass (see the latest pairings to attempt to market it to upscale people).
I suspect that Facebook has no idea what to do with Oculus, but it doesn't want it in the hands of Google or Microsoft.
[+] [-] tvladeck|12 years ago|reply
Most likely this is not "on Oculus deal" (at least not solely) but for many reasons only Mr. Market knows.
[+] [-] DigitalSea|12 years ago|reply
Fluctuations happen in the market every day tech stocks are particular delicate because it can be harder to predict what is going to happen. If you look around, you'll notice Amazon dropped 3%, Twitter also dropped 7% (amongst a few others also down).
We don't know for sure that the acquisition of Oculus even caused the drop. Although, looking back on previous FB acquisitions you see a drop of investor confidence as witnessed with the Whatsapp acquisition.
When Facebook announced the $19 billion purchase of Whatsapp their share price tumbled 4.8%, once again this was a short-lived drop once the fanfare died down. Facebook know what they are doing. The fact Sony are moving into the VR space and apparently Valve are also going to be getting in on it signals this isn't a fad, this is a new-found technology arms race.
He who has the most money wins and at the moment, Facebook have a bit of money and a good network of investors behind them to propel Oculus to the top of the VR market and inevitably beat competitors on not only features but the all important price factor.
Edit: I've been down-voted. I respect that, but if you're going to down-vote my argument at least have the audacity to counteract it in the form of a reply.
[+] [-] danieltillett|12 years ago|reply
[+] [-] unknown|12 years ago|reply
[deleted]