Professor Elam

Tuesday April 10, 2012

My modest prediction, among others, is that the Facebook IPO will be near or mark a top in the ascent of the US Stock market. We have more evidence of that today. FB has bought Instagram for $1 Billion. An editorial in the WS on page A 16 marvels at this and an article in Section B attempts to explain it. 

It's the dot.coms all over again. Instragram has but  a dozen employees. It has no revenue.

Its founder sold his first company Nextstop for $2.5 M to Facebook. He then started Burbn which 'he could not explain to anyone.' HE focused on the photo features. The irony is that Instagram changes a digital photo, one shot on a phone for example, to look like an older polaroid or Kodak Instamatic photo. Polaroid has been through bankruptcy twice sine 2000 and EK is there now, if only they had realized this missed opportunity. 

But FB is 'behind in mobile' and gee we can't have that with the IPO  around the corner. 

Note on page C2, for perspective, the Plaza Hotel in NYC is in play for $600 M. We bet the  Plaza will easily outlast Instagram. 

Our take is this is the whole March 2000 dot.com mania played out again. Instragram has no revenue and is really just a couple of the sort of filters that come standard in Olympus cameras these days. Zuckerberg seems to be falling prey to the moment. But fear not for Mark, he'l be fine. 

An 18 year period of stagnation is caused by emotions running from wildly positive to horribly negative. The dot.com mania had its last 40% move in 4 months, after taking 18 years to get to NASD 3,000. It was propelled by a belief that companies with great IPOs but no revenue would re write marketing as we knew it. Wrong. 

The bottom came a few yeaars later at NASD 1250, one fourth of its high. The dot.coms had become dot.gones. 9/11 was even more depressing. But then, the market discovered real estate which of course never goes down, and we were off again bolstered by absurdly low interest rates. And so the market hit new highs in 208. And then, real estate can go down, and did. 

Now the mania for social media has moved markets up again. This seems even more illusory to me. At least garden.com and appliance.com intended to sell somethng. Instagram is a photo filter which will be on Facebook, which is a digital scrapbook for grandmothers (sorry just my take) which sells 10% of the ads that Google sells. My Space is already on its way to the Netscape / Word Perfect Hall of Fame, built next to the Tandy 1000 / Commodre 64 Hall of Fame Pavillion. 

or as one reporter wondered aloud about Enron, how does this company make money?  The valuations here are not justified. 

From Us Steel in 1962 to Instagram in 2012, you tell me. This is how stock market tops are made.