Posts Tagged PayPal
MAY 17, 2012
For Average Investors, Long Odds on a Big Facebook PaydayBY NATHANIEL POPPER
Facebook shares will be tempting to buy when they start trading on Friday. The company has hefty profit margins, a household name and a shot at becoming the primary gateway to the Internet for much of the planet.
But if history offers any lesson, average investors face steep odds if they hope to make big money in a much-hyped stock like Facebook.
Sure, Facebook could be the next Google, whose shares now trade at more than six times their offering price. But it could also suffer the fate of Zynga, Groupon, Pandora and a host of other start-ups that came out of the gate strong, then quickly fell back.
Even after Facebook supersized its offering with plans to dole out more shares to the public, most retail investors will have a hard time getting shares in the social networking company at a reasonable price in its first days of trading.
Facebook’s I.P.O. values the company at more than $104 billion. And the mania surrounding the offering means Facebook shares will almost certainly rise on the first day of trading on Friday, the so-called one-day pop that is common for Internet offerings. At either level, Facebook’s price is likely to assume a growth rate that few companies have managed to sustain.
New investors, in part, are buying their shares from current owners who are taking some of their money off the table, a sign that the easy profits may have been made.Goldman Sachs, the PayPal co-founder Peter Thiel, and the venture capital firms DST Global and Accel Partners are all selling shares in the offering.
“It is a popular company, but it is still a highly speculative stock,” said Paul Brigandi, a senior vice president with the fund manager Direxion. “Outside investors should be cautious. It doesn’t fit into everyone’s risk profile.”
For the farsighted and deep-pocketed investors who got in early, Facebook is turning out to be a blockbuster. But by the time the first shares are publicly traded, new investors will be starting at a significant disadvantage.
Following the traditional Wall Street model, Facebook shares were parceled out to a select group of investors at an offering run by the company’s bankers on Thursday evening, priced at $38 a share. But public trading will begin with an auction on the Nasdaq exchange on Friday morning that is likely to push the stock far above beyond the initial offering price.
That is what happened to Groupon last fall. Shares of the daily deals site started trading at $28, above its offering price of $20. It eventually closed the day at $26.11.
The one-day pop is common phenomenon. Over the last year, newly public technology stocks, on average, have jumped 26 percent in their first day of trading, according to data collected by Jay R. Ritter, a professor of finance and an I.P.O. expert at the University of Florida.
In many of the hottest technology stocks, the rise has been more dramatic.LinkedIn, another social networking site, surged 109 percent on its first day in May 2011, and analysts say it is not hard to imagine a similar outcome with Facebook, given the enormous interest.
Unfortunately for investors, the first-day frenzy is not often sustained. In the technology bubble of the late 1990s, dozens of companies, Pets.com and Webvan among them, soared before crashing down.
At the height of the bubble in 2000, the average technology stock rose 87 percent on its first day. Three years later, those stocks were down 59 percent from their first-day closing prices and 38 percent from their offering prices, according to Professor Ritter’s data.
The more recent crop of technology start-ups has not been much more successful in maintaining the early excitement. A Morningstar analysis of the seven most prominent technology I.P.O.’s of the last year showed that after their stock prices jumped an average of 47 percent on the first day of trading, they were down 11 percent from their offering prices a month later. Groupon is now down about 40 percent from its I.P.O. price.
“It’s usually best to wait a few weeks to let the excitement wear off,” said James Krapfel, an I.P.O. analyst at Morningstar who conducted the analysis. “Buying in the first day is not generally a good strategy for making money.”
There are, of course, a number of major exceptions to this larger trend that would seem to provide hope for Facebook. Google, for instance, started rising on its first day and almost never looked back.
Even among the success stories, though, investors often have had to go through roller coaster rides on their way up. Amazon, for instance, surged when it went public in 1997 at $18 a share. But the stock soon sputtered, and it did not reach its early highs again until over a decade later. The shares now trade near $225.
More recently, LinkedIn has been trading about 140 percent above its offering price of $45, enough to provide positive returns even for investors who bought in the initial euphoria. But those investors had to sweat out months when LinkedIn stock was significantly down.
Apple is perhaps the clearest example of the patience that can be required to cash in on technology stocks. Nearly two decades after its I.P.O. in 1980, it was still occasionally trading below its first-day closing price, and it was only in the middle of the last decade — when the company began revolutionizing the music business — that it began its swift climb toward $600.
Facebook’s prospects will ultimately depend on the company’s ability to fulfill its early promise. It has a leg up on the start-ups of the late 1990s, which had no profits and dubious business models. Last year, in the seventh year since its founding, Facebook posted $3.7 billion in revenue and $1 billion in profit.
But investors buying the stock even at the offering price are assuming enormous future growth. While stock investors are generally willing to pay about $14 for every dollar of profit from the average company in the Standard & Poor’s 500 index, people buying Facebook at the estimate I.P.O. price are paying about $100 for each dollar of profit it made in the past year.
When Google went public in 2004, investors paid a bigger premium, about $120 for each dollar of earnings. But the search company at the time was growing both its sales and profits at a faster pace than Facebook is currently.
Facebook may be able to justify those valuations if it can keep expanding its profit at the pace it did last year, a feat some analysts have said is possible. But especially after the company recently revealed that its growth rate had slowed significantly in the first quarter, the number of doubters is growing.
“Facebook, by just about any measure, is a great company,” Professor Ritter said. “That doesn’t mean that Facebook will be a great investment.”
- G.M. to Quit Facebook Ad Campaign Worth $10 Million a Year – NYTimes.com (mbcalyn.com)
- Disruptions: Facebook’s Real-Life ‘Spidey Sense’ – NYTimes.com (mbcalyn.com)
- Wanna buy a Facebook share? Why Canadian investors may be out of luck (thestar.com)
- It’s Facebook IPO Week: Here’s Everything You Need to Know [VIDEO] (mashable.com)
- Investor frenzy for Facebook grows (theglobeandmail.com)
- Facebook IPO: Shareholders Looking to Cash Out More (blogs.wsj.com)
- Facebook IPO size increases by 25%, may reach $16B (venturebeat.com)
- A safer play on Facebook shares (business.financialpost.com)
- Utility at What Cost? (jeffnolan.com)
- Facebook IPO shares tough task for small investors (seattlepi.com)
Surviving the cashless cataclysm
By Sebastian Anthony on March 21, 2012
In Sweden, just 3% of the economy is powered by coins and paper money. Public buses don’t accept cash, churches have installed card readers to take donations, and there are even some bank branches that refuse to take your money, opting instead to deal with electronic transfers only.
The European average is 9%, and in the US, the credit card motherland, the percentage is still more than twice that of Sweden: 7%. If you stop and think about it, though, none of these figures are particularly surprising. With the rise of credit cards and store cards (and card readers everywhere), PayPal, online shopping, iTunes, Netflix, and app stores, cash is feeling more outmoded by the day. When was the last time you used an ATM, anyway?
The trend is very clear: Cash is on its way out. It might take another 10 or 20 years for Sweden to get there, and longer for the US and other economies, but eventually so few businesses will accept cash that it will be relegated to jangling jars and cruddy sofa crevices. Governments will have no choice but to halt the fresh minting of coins and printing of bills, and eventually non-electronic money will dry up all together.
This will mark one of the most significant paradigm shifts in modern history. At some point in the future, probably within our life times, you will wake up and your cash will be worthless. After centuries of use, we will no longer have a fungible currency. Gone are the gold sovereigns and silver dollars and nickel-alloy pennies — it’ll all be encrypted, digital bytes, stored in programs like Google Wallet. Instead of handing the shop attendant some cash, you will swipe your phone across a card reader; if you need to lend your friend some money, you’ll just key in a number, bump your smartphones together, and NFC will take care of the technicalities.
I think this will all happen naturally and fairly painlessly. Just 50 years ago, cash (and gold bullion and shares and bonds) would have represented the entire economy — and now Sweden’s on the cusp of killing cash off entirely. It’s just a matter of convenience — and if consumerism has taught us anything it’s that convenience is king. When we’re fast moving towards a world where your smartphone replaces just about everything in your wallet — from cash to tickets to ID — how can clunky coins and grubby banknotes really compete?
Sentimentalists will mourn the demise of bills and coins with national figureheads emblazoned on them, I’m sure, and there will also be an issue with older people, who in general haven’t made the leap to electronic money and would be lost at sea if cash was no longer accepted anywhere. Beyond that, though, there’s a far more pressing question that governments (and societies) will have to answer: Will we let private corporations track, collate, and cross-reference every single one of our transactions?
You see, in a cashless society every single payment is digital, which means that every transaction must be confirmed by the bank or institution that governs your money. In turn this means that every move you make will be recorded in a huge database. Your bank will know where you get coffee in the morning, the route you take to work, and if there’s a vending machine at your office it might even know where you work. Likewise, your bank will know that you like to buy things on Amazon while you’re at work, that you enjoy watching X-rated movies when you’re on the road, and that you always leave it until the last moment to buy your wife a birthday present.
At this point it’s commonplace for self-respecting libertarians to leap up and decry the awful, privacy annihilation that I’ve just described. How could you live in a world where the Rockefellers can track your every move?! they cry. Well, get this, every credit card company, bank, and sizable corporationalready tracks your transactions.
Have you ever had a call from your bank, asking if a purchase you just made was fraudulent or not? Banks employ incredibly complex software (on beefy computers) to analyze billions of transactions — ostensibly to detect fraud (which costs banks millions of dollars a year), but of course other patterns can be detected as well. Just as one example, BillShrink has worked with 2,000 banks to analyze your buying habits, and then to provide targeted coupons on your monthly statement. Obviously it’s rather cool to automatically receive a $5 voucher for McDonald’s if your bank detects that you spend $100 under the greasy shadow of the Golden Arches every month, but it’s a little bit creepy too. It is, after all, exactly the same as Google or Facebook’s targeted advertising — but possibly even more accurate.
The fact is, cash is anonymous — and humans love anonymity. It’s not that we require it all the time, but a free society demands that the option is there. Whether you’re paying for something embarrassing, like a prostitute, or privately funneling money to a charity, it’s nice to have theoption of paying with a currency that cannot be directly tracked back to you.
On the flip side, though, corruption, tax avoidance, and many other crimes are all linked to the fact that cash is very hard to track. Taking Sweden as an example again, in 2008 there were 110 bank robberies; in 2011, there was just 16, the lowest since records began 30 years ago. In Italy, where cash is alive and kicking and graft and tax evasion are rife, the Prime Minister recently announced that he plans to limit cash payments to 1000 euros ($1300), down from 2500 euros. It is not a coincidence that Italy and Greece, two of the most volatile economies in Europe, both have strong cash cultures.
It would seem that you can’t have your cake and eat it too. Money is either accounted for by a central authority (electronic transactions), or it isn’t (cash). You are either protected (and snooped on) by the auspices of governments and mega corporations, or you’re not. There is another option, however.
Saved by technology, again
The important thing to remember is that untraceable, anonymous cash isn’t dead yet. Bills and coins might be on the way out, but that doesn’t mean that they can’t be replaced by an electronic equivalent. If Bitcoin has proved anything it’s that you don’t need a central authority to manage electronic trades — and just look at iTunes gift cards and pre-paid Visa and MasterCard credit cards; they’re not quite as anonymous as cash, but they’re close.
Bitcoin has failed because it doesn’t have the backing of a central bank, but there’s nothing to prevent national governments from issuing irreversible, cryptographic cash that could then be stored on “credit chips” (i.e. your smartphone, or even a coin-sized piece of solid-state memory). This digital cash would act just like its physical counterpart: You could deposit it in your bank, pay for groceries, or even lose it down the back of your sofa. You could pay people by physically giving them a credit chip, or by transferring them via smartphone. Digital cash would still have the same issues as normal cash — graft, tax evasion, robbery — but that’s the price we pay for freedom.
The benefits of a purely digital economy are massive. If you think about it, dealing with physical cash is incredibly difficult. You need cash registers (which aren’t cheap); you have to constantly monitor employees for theft; you need a safe to keep the money in between collections, and collections themselves are expensive too. A wholeindustry revolves around the safe handling, transportation, and counting of coins and bills. With digital currency, all of those difficulties disappear. With PayPal, you can set up an online business in minutes. With Square, your iPhone or Android smartphone becomes a point of sale.
And then there’s the analytics! If you think you have problems managing your money, imagine if you could plug your credit chip into your computer at the end of the month and find out exactly how you spent (and wasted) money. You wouldn’t have to give up this info to a third party — but if you did, there would be even more advantages. Imagine a group buying website (like Groupon) that analyzes your credit chip and matches you to 10 other local Coke drinkers; instead of each buying a 12-pack from the supermarket, you could club together and buy a case from the wholesaler.
Anonymous, digital cash isn’t a given, though. We will probably have to fight for it. Conspiracy theorists are exceptionally talented at conflating fact and fiction, but they’re not wrong when they say that totalitarian governments and megacorps really want monitor our every move. The demise of physical cash is the perfect opportunity for governments, under the sway of powerful lobby groups, to transition to trackable currencies that are governed by a central computer. This will probably be one of the biggest hurdles that we will face in the twenty-first century.
Swedes, when the referendum to abolish paper money finally rolls around, be sure to vote for the creation of a digital, anonymous equivalent. The rest of the world will watch and take its cues from you.
- Surviving the Cashless Cataclysm (news.slashdot.org)
- Will Sweden Be the First Cashless Society? (bigthink.com)
- Sweden moving towards cashless economy..even at church! (seeker401.wordpress.com)
- Who In Their Right Mind Would Want A Cashless Society? (ghacks.net)
- Sweden moving towards cashless economy (cafewitteveen.wordpress.com)
- Sweden goes cashless, the world may soon follow (theextinctionprotocol.wordpress.com)
- As Sweden Goes, So Goes the World: The Beginning of the End of Cash (blogginghounds.wordpress.com)
- Sweden Going Cashless: Pros and Cons of Paper Money (ibtimes.com)
- Sweden moving towards cashless economy (disclose.tv)
- Swipe Your Card for the Lord (patospapa.wordpress.com)