About Me 0001: Stock Making Money

In recent months, as investors in secondary private markets have bid up Facebook's value to ~$56 billion, many folks had begun to wonder whether it was silly season again.

After all, the investors buying Facebook stock at these levels weren't even seeing the company's financials. All they were going on was the amazing growth of Facebook's user base and press reports about its ~$2 billion in 2010 revenue.

Well, all that has changed now.

Goldman Sachs just bought $450 million of Facebook common stock--common stock, not preferred stock--at a $50 billion valuation.

In order to make a bet that big, Goldman would almost certainly have been given access to Facebook's detailed financial information (full financial statements, etc.). This suggests that Goldman liked what it saw enough to put nearly half a billion of its own dollars on the line at a $50 billion valuation. And by buying common stock, not preferred stock, Goldman is also accepting the downside risk of this investment. So one suspects that it is at least reasonably confident that there is big upside to Facebook's stock from here.

True, Goldman could presumably quickly turn around and sell the Facebook stock it bought to its own clients, thus laying off the risk (and making a quick profit on the stock at the same time.) After all, one of the reasons Goldman did this deal was to get the ability to buy another $1.5 billion of Facebook stock for its own clients. But if Goldman did this, and Facebook's stock tanked, Goldman would get slaughtered for, once again, putting itself ahead of its clients. And here's hoping (dreaming?) that, at least for now, Goldman has decided that it is better to bet with its clients instead of against them.

And it is also true that Goldman will rake in huge fees from managing its clients private investments in Facebook. (The "special purpose vehicle" Goldman will create to pool its clients' investments will almost certainly come with big fees attached. Goldman's not doing this out of the goodness of its heart).

But, still, $450 million is real money. And Goldman, a well-informed and sophisticated investor, just stepped up to the tables and made a bet on Facebook at a $50 billion valuation.

So that's a pretty good indication that Facebook is actually WORTH $50 billion.

See Also: Goldman Sachs Clients Can Invest In Facebook's IPO But You Can't (Time For A New Public Market)

Seriously? This is the question of the day? When people are still voicing serious and legitimate concerns about the rest of the economy? We're talking about a company with enough money in the bank to make a Goldman Sachs-sized investment in Facebook if it wanted to, more than triple the amount Dell had in the bank at the end of the last quarter, plus more than five times the amount HP had too, while we're at it.

Let's look at a number for a minute: Apple has 51 billion dollars in cash. That's 51,000,000,000 bucks. Or, approximately the amount of money it takes to fill a vault-slash-swimming-pool. Who has that kind of money these days and didn't get it via government bailout? Apple, that's who. What is its secret? It made that money the old-fashioned way, by selling new-fashioned things.

In a time when few companies are profitable and everyone's excited about a flat line since it isn't a downward curve, Apple is making money iHand over iFist. One could presume from this that analysts and others who watch CNBC professionally would be excited about a company with growth and profitability in the current climate. However, that's not the case.

Remember when Apple wasn't doing well? Those bygone days when people may have actually believed the name of the company was "Beleaguered Apple Computer?" Well, once Uncle Steve made his return in 1996, that started to turn around. Apple Computer started making things that start with "i," and in 2001 with the launch of the iPod, Apple was officially cool again. You know, unless you were an analyst on Wall Street, in which case Apple wasn't cool, it was just less lame than before. But seriously, have you seen what sort of stock prices Dell and HP have these days? Now those are tech companies.

I call shenanigans! Now, instead of being impressed with profitability, the question is "Oh sure, you're all profitable, but can you stay that way?" Apple hasn't proven that yet? Explain to me how making ANY money in a time of unprecedented financial volatility is something that gets played down. What will it take before Apple gets a fair shake? A brand new device that sells a million units in three months? Try two and a half. A new version of the same thing released a year later, how long did that take to sell a million? Three days.

Find and replace "Apple" with a non-tech company in some of these articles and see if it still makes as much sense. Just the iPhone product line by itself is bigger than Coca-Cola, but Apple still gets dismissed like this?

Someone needs to have a little heart-to-heart talk with some of these guys. Apparently they've all had their heads down in their BlackBerrys for so long that they don't realize it's cool these days to carry around something Designed In Cupertino. Clearly a lot of other people have figured it out -- what's stopping Wall Street from seeing the light?

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Monday, 10 January 2011

Stock Making Money

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