Unraveling the Facebook fiasco

By the time the core smartphone migration problems were made clear, it was already a bridge too far.

By Jim Cramer Aug 20, 2012 9:35AM

"He hated Facebook (FB)." "No, he liked Facebook." "No, he flip-flopped on Facebook." "He gaffed me on Facebook." "He saved me in Facebook."


What exactly did I do with Facebook? Whom did I help? Whom did I hurt?


With Facebook's stock coming apart at the seams -- falling to an all-time low Monday of less than half its IPO price -- and lots of finger pointing going on, it may pay to spend a minute or two on what really happened with this debacle. That's because this has a lot more to do with Facebook itself, and the facts that changed involving Facebook, than it does about anything else that went on.


First, going into the road show for Facebook, everything looked extremely tight. The story was intact, featuring terrific membership growth and fabulous profits -- not just sales -- that were growing at a pace not often seen at any company.


I was drawn to it for two reasons. One, the facts: This was no ordinary company, nor was it an ordinary growth stock. This was a company with almost a billion users, most within the great demographic with which it's often so hard for advertisers to connect. The second, well, let's just say I am old. I lived through the previous dot-com craze, and we have to view this one as a craze, too. Given the time that's passed, this made me one of the few on Wall Street who have lived through every phase of the craze and knew how it would play out.


Going into the last week of the deal, while interest was still accumulating, I liked Facebook the company and Facebook the stock. Anyone who has ever lived through an Internet stock IPO, as I have -- and this totals about 500 people, give or take 100 -- knows the difference and the divergence, because the Internet captures the public's fancy like no other.


But with days to go before the deal, we heard that General Motors (GM) didn't like the website as a place to advertise. I quickly made my calls to the other large advertisers I know, and no one agreed with GM. Again, I have a good sample to go to, because I had always asked about the effectiveness of Facebook anyway, as I've been curious about the whole Internet business since I started TheStreet.


But because I had my ear to the ground at the underwriters' outfits, notably at Morgan Stanley, I picked up concern that Facebook wasn't growing as fast as we thought it was. It wasn't as if I got a call that said "This Facebook deal is a dog." Instead I got the call that the underwriters were increasing the size of the deal in order to meet retail demand but that they weren't certain Facebook was prepared for the rapid cellphone adoption plaguing its business.


I then checked around other website companies, and it looked like everyone was trying to deal with a remarkable migration from desktop to cellphone. It seemed Facebook was particularly bothered by it because CEO Mark Zuckerberg wanted to protect the user experience, and that meant not junking up the site with advertisements no one wanted to see.


At that point, with retail orders flooding in as the dealer-managers unleashed a flood gate of previously locked-up stock, it became pretty clear what would happen. You would have to buy the stock on the deal, and then flip it when it rallied.


That is what I suggested. In other words, you could like the stock on the deal as long as you could sell it, but not more than that -- and that's because the facts had changed twice. First, there was going to be much more supply. Perhaps that was because the big boys were given a chance to get out at a price that now seemed unrealistic, given a possible slowdown in Facebook's business, and there was still going to be terrific demand. The regular public, after all, didn't understand this new slowdown story that was emerging.


So what happened? While there were plenty of snafus and we saw lots of slothfulnesss, indigence and amateurish behavior by people we thought were professionals, the stock did open high and you had to flip. The problem that I didn't foresee was that they wouldn't let you flip because the machines broke. But it was the trade you had to make.


Ever since then, the stock has been going one way only, as everyone now knows that Facebook didn't really have a plan for the rapid adoption of smartphones as the preferred interface. Despite what the adults tell you, the kids don't like ads, and while they may look at them on their desktops and on their televisions, they are not interested in them on their cellphones. That's even the case if they are packaged in helpful stories or if they're done on the sly.


The ethos of not clicking on the ads is as thick as was the prevailing ethos when I started TheStreet -- that is, if you charge, it will fail. Of course, if I had not charged, we would have failed because I would have run out of money. Facebook, on the other hand, has tons of money. It isn't about to fail, and it has the flexibility to figure out how to make more money off cellphone use. It just doesn't have the flexibility of having a rising stock as it tries to figure out what to do to save the growth it once had.


Facebook, mind you, is not a fad. Advertisers do like it as a means of figuring out how to engage with their customers, and particularly with their youth. These companies are, frankly, almost all amazingly inarticulate about how it really helps them, but I think they like Facebook because it makes them feel in touch -- and no one is ever going to say "I want to be less in touch with my customers." Most look at Facebook as a superior form of a focus group. They look at Google (GOOG), however, as a superior form of advertising, and those are very different things.


Even Facebook seems confused as to what it should do about this. It talked about Electronic Arts (EA) being one of a handful of customers that thought Facebook was integral to its growth, perhaps to counteract how Zynga (ZNGA) was dissing it in every forum as the reason for the downturn in its business. But EA didn't say anything positive about Facebook on its call, and it had ample opportunity to do so.


To add it all up, Facebook the stock has been a fiasco largely because Facebook the company hit a wall -- the wall of a massive lightning-speed transformation from desktop to cellphone among Facebook users. That cut user engagement and diminished advertising appeal shortly before the deal went public, but it was too late to pull the deal and too dangerous to tell everyone how difficult things had gotten. Facebook was at a bridge too far, and there was no return for anyone -- except for the sellers who, of course, made out like bandits.


Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and has no positions in stocks mentioned



More from TheStreet.com

Aug 20, 2012 11:25AM

Mr. Cramer.......this is 17 paragraphs about nothing.  Why do you always seem to have an answer on an ex-post-facto basis?  We have those answers also.  You erred, and in 17 paragraphs failed to admit it. I think cell phones were reasonably prevalent 3 or 4 months ago.  You are paid to analyze in advance.  Coroners are paid to do post mortems.  You, sir, are a market coroner until you get something....anything.....right!


Aug 20, 2012 11:12AM
Jim, you sidestepped any responsibility by saying how Facebook the stock was a good deal on the IPO for a flip.  Really?  Only good for a flip?  If that was the case you should NEVER have recommended even touching it.   Ah, I have the advantage of being a Monday morning quarter back while you have the job of damage control.  Later in the article you insinuate that your readers should know the red flags to watch for.  Once again.  Their bad.....not yours.  Hey buddy, take some responsibility.  You are not a Buffet and never will be.  A gambler?  Definitely!!  I have no ax to grind here because I was not involved in any way with FB. 
Aug 20, 2012 10:00AM

Blah, blah, blah. All I know is that not one analyst or commentator in the mainstream media ever once advised investors to short Facebook, or buy puts, or play the downside in any way, even after those opportunities became available. And that was the only kind of advice that would have been worth anything to small investors if they had followed it. So, what’s the point of listening anymore? Frankly, I did much better by following my own advice this time. I am sooo lovin’ right now those Jan $20 put options I bought when the stock was trading at $26.


Aug 20, 2012 11:06AM

What's to 'unravel' here???? It's very simple: FB is not a product and does nothing. Now if all the...ahem.....investors had made a killing on this non-product clusterf**** nobody would be complaining. But because these whinning idiots lost thier shirts on this non-product clusterf***, we have to have investigations and try to 'unravel' it. I'm glad you all lost money; serves you right.

Aug 20, 2012 11:56AM

"I lived through the previous dot-com craze, and we have to view this one as a craze, too. Given the time that's passed, this made me one of the few on Wall Street who have lived through every phase of the craze and knew how it would play out."


Wrong. Anyone who owned stock, mutual funds, or had a 401K from about 1997 lived through it. That should be several million people.

Aug 20, 2012 11:32AM
LOL, this stock is destined to drop to $5-$7 a share in the next year.  How fun!!!
Aug 20, 2012 11:35AM

If Cramer was Obama it would have been George Bush's fault.

Excuses are like A$$holes Cramer-Everybody has one.

Suck it up-Another Cramer Dog-No wonder the Eagles are losers!!!!

Aug 20, 2012 12:18PM
Something will come along and replace facebook. I always thought My Space was better.
Aug 20, 2012 12:30PM
The jury's still out from where I sit, but I think Facebook could be going the way of the dinosaurs.
Aug 20, 2012 12:19PM

Poor old Cramer...he has become so low he actually believes his own bullsh*t.

When he gets up in the morning and looks in the mirror he actually sees a good person when

there isn't one there . You're going to the lake of fire with all your kind........I'm going long

Stay Puff and Oscar Meyer

Aug 20, 2012 1:54PM
huh?? what??!! what the hell is there to "unravel" exaclty?? Foolsbook was a phoney IPO mostly smoke and mirrors, overhyped, overpricedd and over played on Wall st. and it was a colossal failure and never worth billons in the first place and there isn't a sane rational thinking person with a third of a brain cell functioning that couldn't see that, and Foolsbook is worth in all reality about 1.57, wait!! make that 0.67 cents, and I'm sure at the end of trading it'll be 2 cents, and then, finally.............. no cents!! just like anyone buying this stupid stock makes, NO SENSE!!
Aug 20, 2012 12:48PM
Aug 20, 2012 12:29PM
Jim.  Go back to basics.  The same ones you preached about on the radio before you became a big TV star.  The facebook accounting statements show a stock valued at $6.50.  I pointed this out when the IPO was issued and as soon as I could I went short and bought "puts".   This was assuming the accounting statements were correct and we have never seen an audited copy of these statements.  This was assuming that the customer base remained intact but the user base is now clouded with corrections of bogus accounts and abandoned accounts. This was assuming that facebook stayed out of legal trouble but last week a judge stipulated that $20 million is grossly insufficient to handle the current violation of personal privacy lawsuit and there are more to come.  So I sold my September "$25 puts" for a $6.00 dollar profit on a $0.54 investment and there is more to come in February.  Where did you put your money?
Aug 20, 2012 11:33AM

why do people even listen or read this guys rubbish. He couldn't call a stock if his life depended on it..





Aug 20, 2012 2:26PM
I'd sum up the article is "well, I liked it, but then after it went IPO, I realized I didn't know what I was saying before, so then I told you to dump it, but you couldn't because the machines broke".   That is very useful, Jimbo
Aug 20, 2012 2:22PM
I think FB will have a hard time "monetizing the mobile users" because, well, it isn't "cool" to be monetized.  Once the 25 and under crowd gets tired of the attempts to be monetized, there will be a vast exodus from FB and something "cooler" will have emerged in its place.  I don't think FB will ever see $30 again.
Aug 20, 2012 1:04PM
you can fool all of the people some of the time and some of the people all of the time,,,BUT you can't fool all of the people all of the time...P.T. Barnum
another bad call from Cramer have made millions going against his bets :)
Aug 20, 2012 1:41PM

Issue is you are not teaching people how to invest you are teaching them how to trade. Super risky. People will never trade as well as a computer. Investors trying to trade will lose their money fast.


You tell people to buy CRM? That is not an investment its a trade. They make no money, they report non-GAAP, there loses keep growing, but the stock is going up. Why, people trade, looking for the bigger fool.


AMZN, LNKD are out ragous. 280 and 800 times earnings. Not an investment.


FB is the same story. You did not recommend as an investment, you recommended as a trade and you where wrong.


'Everyone uses facebook, sure everyone used a hulahop too. How do they make money, selling ads. Is that worth 85 times earnigns? Maybe as a trade, not as an investment.


I wish you would come out and tell people, "This is a trade", "This is an investment". Buying LNKD at 800 times earnigns is not an investment.

Aug 20, 2012 12:16PM
What worries me most is the direction FB has gone over the same time period where we've seen a sizeable market run-up.  If you believe the markets are overdue for a correction, this is the last kind of stock you want to be holding.

And yes, I'm speaking from experience.  My worst losers have been stocks that have gone *down* while the rest of the markets are going *up*.   All I could say to myself at the time "wow, it sucks to be me".

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