Don't worry, I'm not going to put a melodramatic video on YouTube where I call on people to "Leave Facebook (Nasdaq: FB) alone... leave it alone," but I am going to offer my case for why Facebook and many other recent IPOs have been given a bad rap by investors.
Let's not beat around the bush: We, as investors, are horrible predictors of disruptive technological trends and are considerably more resistant to change than we think. This doesn't mean that we don't see trends as they're developing, but it does mean we're awful at predicting how quickly these new technologies will become mainstream growth drivers.
Let's take a closer look at some recent IPOs, including Facebook, for evidence of this, and I'll show you how this trend has been perpetuated for a very long time.
Facebook didn't create this problem, you did!
Facebook's IPO will remain a mockery among Wall Street analysts and investors alike for years following the botched IPO that left investors of all calibers wondering for hours or days if their buy or sell orders had been executed. That failure had absolutely nothing to do with investor perception and everything to do with our flawed IPO system.
However, all blame since that event, including for Facebook's 50% tumble from its IPO price, has been placed by investors squarely on the hype surrounding Facebook's social media implications and its inability to live up to increasingly elevated expectations. Not only is this assumption unfair, but it further perpetuates a more than decade-long trend: We are terrible at timing investment in disruptive technologies.
I know this might sound a bit like a chicken-or-egg debate -- did investors create an overvalued company, or did Facebook's success create an overvaluation that only fueled investors' buying? -- but it's clear to me that Facebook isn't to blame for its share prices' poor performance. Investors frequently jump on Facebook for not monetizing its 102 million mobile-only user base, or for failing to capitalize on the 543 million unique monthly users accessing Facebook via mobile phones each month, but look at the precedent -- there isn't really an established market for mobile ads at the moment. Google (Nasdaq: GOOG) holds more than half of all mobile-based ad market share, but even that is just a fraction of what search and social engines are bringing in through PCs and laptops. Facebook can't just monetize its mobile users overnight, but the perception on the Street is that it should and it's being penalized for not snapping its fingers and making it all better instantly.
Irrational expectations go far beyond Facebook
Apparently, misery must really love company, because Facebook isn't the only company that's fallen under the disruptive-technology guillotine in recent months. Daily-deals site Groupon (Nasdaq: GRPN), which, like Facebook, has relatively low barriers to entry, has seen more than 80% of its value evaporate since it went public. Is the sell-off that ensued in Groupon's stock warranted? Possibly, given Groupon's lukewarm earnings results, but have investors given the daily-deals model an ample amount of time to mature? I don't think so.
These examples of investor impatience and irrational expectations extend all the way back to the dot-com bubble in the late 1990s and early 2000s. After being valued at $106 per share in December 1999, Amazon.com (Nasdaq: AMZN) traded for less than $7 per share in October 2001, less than two years later. The hype surrounding Amazon back then is very reminiscent to the expectations surrounding social media and cloud-computing now.
As we can see from a 15-year chart, Amazon is up well over 12,000% since it debuted, making it a very successful trade over the long run, but investor perception and adoption of its interactive selling platform and the adaptation of its cloud products took much longer than investors had predicted.
The expectation of immediate outperformance extended far beyond the technology sector as well in the early 2000s. Among the best performers during the dot-com era were biotechnology companies focused on sequencing the human genome. These sequencing companies were projected to change the way doctors diagnose diseases and dramatically reduce preclinical study times for development-stage biotechnology companies. What actually happened was that many of these DNA-sequencing companies lost nearly all of their value from their highs as the high costs of their research and the large amount of time spent sequencing the human genome crushed investors' expectations and made their sequencing products unreasonably pricey. However, more than 10 years later, you can finally see evidence of success in genome sequencing from the likes of Life Technologies (Nasdaq: LIFE), which has managed to cut the cost of genome sequencing down to just $1,000 and can turn around its sequencing results in just one day.
The idea works, but investors' timing does not
In more cases than not, the idea behind a new and innovative technology does work, but the time frame that investors are giving the technology to succeed is completely unreasonable.
Facebook has grown from a college-based social networking website into a $42 billon social media giant that caters to 955 million users through a social, gaming, and advertising platform in just eight years. My question is: How can investors fault Facebook for not hitting its targets when Facebook hasn't even had time to completely outline its goals yet? Every disruptive technological idea over the past 15 years has required tweaking and adaptation. In most cases, the idea works, but rarely is it a resounding success right out of the gate.
So, people... please, I beg of you... stop blaming Facebook for letting investors down. You let yourselves down by falling right back into the same trap of irrational expectations that's been perpetuated for more than a decade.
Agree? Disagree? Think I'm irrationally exuberant? Tell me and you fellow Fools about it in the comments section below.
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