
Facebook shares fall 7% on Oculus deal - Varcht
http://www.latimes.com/business/technology/la-fi-tn-facebook-shares-fall-on-oculus-deal-20140326,0,5772521.story#axzz2x6wLDZwD
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simon_
A decline in market value of more than $10B, implying that for the $2B FB
spent, they will receive hugely negative value.

Seems extreme, although it was a bad day for tech stocks anyway, so the
portion of the drop attributable to the acquisition is surely smaller.

Anyway, the market seems to be communicating that not only does it think FB
got bad value, but that this deal is bayesian evidence that it is being badly
managed.

EDIT: I still don't think 100% of the decline is attributable to the broader
market move, because TWTR and certainly KING should be more volatile than FB.
But, yeah, the story might not be as clear as I thought.

~~~
psbp
Maybe investors are mad about their shares being diluted through these stock
deals?

~~~
tedsanders
Rather than mad, perhaps the investors are taking it as a signal that Facebook
management, by buying other companies in mostly stock deals, believes that
Facebook stock is overvalued.

That could be a rational rather than irrational explanation.

~~~
vanwesson
Bingo. The Oculus and WhatsApp deals have added up to billions "spent" via
mostly stock instead of cash. This is almost certainly due to insistence from
the Facebook execs themselves, who clearly are expecting the price of their
stock to fall in the long term and are attempting to extract some value from
it while the price is still high.

~~~
danieltillett
The real evidence for this will be if Facebook buys TimeWarner.

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melvinmt
That's nothing, AWS prices fell 60% upon hearing this news.

~~~
sbashyal
That's not right - AWS prices did not drop due to Oculus Rift news but the
Google Cloud news:

[http://www.forbes.com/sites/benkepes/2014/03/25/google-
slash...](http://www.forbes.com/sites/benkepes/2014/03/25/google-slashes-
cloud-prices-and-ups-the-cross-platform-support-ante/)

~~~
brokentone
You're missing the joke. He understands the two have no way to be causally
connected, but drawing the connection is hilarious.

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shittyanalogy
You guys are falling for crappy financial news and are up-voting it out of
personal opinion vindication.

~~~
badman_ting
Yeah, stories like this are garbage. Nobody knows why day-to-day fluctuations
in the market happen. (Mostly.)

~~~
pseut
A priori, sure. After the fact, if you have detailed enough data it can be
pretty easy to identify the timing of certain events.

It doesn't mean that the reaction is _correct_ or that it won't be undone in
the future. But there's a huge difference between "day to day fluctuations are
unpredictable" and "day to day fluctuations are inexplicable."

~~~
Retric
Twitter was also down 7% today do you think that's explained by the Occulus
deal?

The reality is the markets react to thousands of individual factors and often
small changes lead into positive feedback loops. So, while the timing may be
explained by some news breaking the magnitude of change is generally
influenced by all those other factors.

~~~
pseut
No, I'm thinking of frequencies higher than 1 day.

------
nroman
In other financial news, Twitter shares fell 7.2% on the Oculus deal. Tesla
lost 3.4% on the Oculus deal!

</sarcasm>

~~~
joelrunyon
Well less people will probably buy Tesla's now that they can try out their
facebook friend's Teslas with their new Oculus' :)

</s>

------
ceph_
Looking at other tech stocks this seems like more of a broader downturn today.
Twitter was down 7%, Zynga was down 4%, Amazon was down 3%. Correlation ≠
causation. I'm not buying the drop is from the Oculus buyout.

~~~
reqres
I think you can get a rough sense of whether this is true by using Beta
([http://en.wikipedia.org/wiki/Beta_(finance)](http://en.wikipedia.org/wiki/Beta_\(finance\)))
- Beta represents the riskiness of the stock relative to the market as a whole

After a quick google it seems Facebook's beta is ~2. So a NASDAQ fall of <3.5%
is an indication that something other than a general downturn impacted
Facebook's price

Please correct me if my understanding is wrong

~~~
brisance
The first paragraph is correct but the second is not quite right, and is a
common misconception. Beta is a lagging indicator and by itself cannot explain
a stock's movement or lack thereof.

There are much better guides to stock volatility such as the put-call ratio,
implied volatility of options or general market volatility as measured by VIX.

------
JumpCrisscross
I am no Facebook bull. But the financial logic in this article is lacking.

Facebook fell 7% in trading today. The NASDAQ fell 1.4%. So we have 3 (β=3) to
4 points (β=2) of excess losses. The author argues Facebook dragged down the
NASDAQ today. Let's suffer the assumption. Using the S&P 500's 0.7% fall we
see 5 to 6 points of excess losses. On a day the NASDAQ 100 Volatility Index
jumped over 1 point intraday to 18 [1]. I don't smell blood yet.

Macquarie sees “no near-term financial model that will drive the $2 billion
valuation.” Cross-posted below is my back-of-a-napkin work from a prior
comment [2]. Development kit sales are not a perfect predictor of consumer
sales. That said, they provide a snapshot of present enthusiasm for Oculus.
They are also useful for forming ballpark estimates.

Oculus VR says it has sold 75 000 "development kits" [1]. It has been 1 year
and 7 months since August 2012 [2], when Oculus VR began selling its
development kits. Let's assume a 200% YoY 2013 growth rate - that means 56 000
kits were sold in 2013. Let's say these keep selling at the $350 the Developer
Kit 2 goes for [3]. That's $20 million in 2013 revenues. Let's turn that into
$2 million of profits - a 10% margin.

Let's value Oculus VR as if it were a growing perpetuity. If Facebook had a
cost of capital of {10%, 20%, 30%}, Oculus VR free cash flow (FCF) would have
to grow at least {10%, 20%, 30%} a year. Otherwise, its $2 billion price tag
would not make sense.

Companies are not immortal. Let's value Oculus VR as a 20-year growing
annuity. Setting Facebook's cost of capital at {10%, 20%, 30%}, Oculus VR's
FCF would have to grow at least {45%, 58%, 71%} a year.

Not a bad deal.

[1]
[https://www.cboe.com/micro/vxn/#historical](https://www.cboe.com/micro/vxn/#historical)

[2]
[https://news.ycombinator.com/item?id=7471826](https://news.ycombinator.com/item?id=7471826)

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joezydeco
At lunchtime today I was listening to the "business hour" on the radio. Two
analysts went back and forth about the deal, repeatedly calling Oculus "a
company that makes virtual reality games". There has to be a certain % of Wall
Street that has no idea what's going on at all.

~~~
WalterSear
I think this dip is a promising short term buy.

~~~
joezydeco
Or, as I saw someone else recently commented: _" Facebook is shorting the hell
out of their own stock"_

------
ot
Another factor that probably influenced (maybe even more than Oculus?) the
decline is today's IPO of King.com, that lost 15% wrt. the initial price.

------
digz
I'm shocked that it didn't fall because of the Oculus deal, but look at
twitter vs. fb in the last 48 hours... heavily covariant.

[https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...](https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1395874630905&chddm=782&chls=IntervalBasedLine&cmpto=NYSE:TWTR&cmptdms=0&q=NASDAQ:FB&ntsp=0&ei=_VozU7DbBoWkqgH1mwE)

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pdknsk
"Oculus" briefly spiked 14% today when NASDAQ opened.

[https://www.google.com/finance?q=NASDAQ%3AOCLS](https://www.google.com/finance?q=NASDAQ%3AOCLS)

~~~
TrainedMonkey
Automated trading software perchance?

~~~
bsamuels
Either that or day traders who have absolutely no idea what they're doing.
Both are equally probable.

~~~
necubi
Or people hoping to capitalize on others falling for this...

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bobbles
I was disappointed when I heard the acquisition news, but NOT because I
thought it was a bad move by Facebook.

Buying companies like this will undoubtedly come back for them and help them
be a dominant force.

The problem I have with this deal is that a vision of a geek oriented, gaming-
first hardware-first company that had the support and faith of the community
now WILL be influenced by the vision of a company that many people do not
trust.

It's not a lack of trust in Facebook for the sake of it, but from many years
of repeatedly abusing the trust of their user base.

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jamesie
this is a poor headline. the latimes.com seems to imply causality between the
two events when in fact, twitter fell 7% as well. So they could have written
"Twitter falls 7% on Oculus deal"

~~~
lutorm
Market news writers seem to _always_ think they can attribute the market
change to some event, even though they have no idea. This irks me to no end.

~~~
jimmytidey
I guess you might have quite a short career as a market writer if you didn't
want to link events to prices. You'd certainly write very short articles.

~~~
jamesie
Are you saying that wouldn't be a good thing?

Automate this... <stock ticker> <fell|climbed> <x>% on <top company event of
the day> \- it's still be wrong but at least it wouldn't waste a writer's
time.

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ChrisClark
Pretty much because investors want a quick buck. They don't want to wait until
Facebook owns the internet after mobile. That's way too far away and way too
uncertain.

~~~
jfoster
I think it's a combination of factors.

I don't think many investors are familiar with Oculus VR. To them, facebook
has just paid $2B for a company that hasn't released a product to consumers
yet, and intends to make one of those headsets that were a big flop in the
1990s.

The other side of it (as you point out) is that institutional investors are
generally not in it for long-term gains. If you manage a portfolio at an
investment company, are hoping to get a nice bonus this year/quarter, hearing
Mark Zuckerberg say he's bought a company that might take 5 - 10 years before
it adds anything to Facebook is probably not very impressive.

~~~
notastartup
you are right but for value investors, I think that Oculus Rift could have a
quite a big impact on the intrinsic value of Facebook, now the risk is, can
they get it right? A non-gaming company getting into 3d virtual reality?
Clearly, Google (actual experience of making hardware) doesn't think the
timing is ripe yet.

What we have with Oculus Rift is that they were spooked by Sony, and decided
to cash out while they still could.

VR will be a major major step for Sony if they get it right (which they are
likely to do so) with PS4. They would absolutely own this space with their
experience in 3d entertainment hardware.

~~~
hershel
Sony has one major disadvantage: they are tied up to the ps4 while PC's which
are more powerful/upgradable are a better fit for VR.

There's rumors microsoft is working on VR. They also have an amazing 3d game
creation platform for beginners called "project spark", very good at building
developer communities a and would be happy to sell more PC's. Assuming they
can create decent VR glasses, they seems to have the winning combination of
hardware + content.

Even better - project spark content would be free, which is a powerful tool to
achieve mass appeal.

~~~
jfoster
They could always just do what Microsoft did with the first Xbox. There is
nothing stopping them from putting a PC in a fancy box if that is a better
product (VR versus no VR) than what they would otherwise do for the PS5.

------
fuddle
The whole market is in a downward trend at the moment, its not just affecting
Tech stocks.

------
ashray5
I don't think people should attribute today's FB action to the Oculus
acquisition or its price/terms. A slight negative chatter (Read: "Amateur CEO
wasting money on useless toys") could easily make big momentum reversals,
especially in case of a stock that mostly priced by sentiment versus intrinsic
cash flows. Disclaimer: I'm by no means disparaging momentum strategies.

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gfodor
eh, TWTR dropped 7% too. wider market sold off.

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bsder
While the market, in general, is probably responsible for most of this, it is
an interesting question as to what investors think about this.

All of the Facebook acquisitions seem to be defensive. Even Oculus is a
defensive maneuver against Google Glass, and the fact that Google is
unquestionably committed to marketing Glass (see the latest pairings to
attempt to market it to upscale people).

I suspect that Facebook has no idea what to do with Oculus, but it doesn't
want it in the hands of Google or Microsoft.

------
tvladeck
Twitter shares also fell by over 7% and the NASDAQ by 1.43%.

Most likely this is not "on Oculus deal" (at least not solely) but for many
reasons only Mr. Market knows.

------
DigitalSea
People are making a big deal out of nothing here. The bad publicity around the
acquisition (if anything) caused the share price to drop, not investors
misguided confidence in virtual reality tech. Lets not confuse the two. If
people were applauding the acquisition, we would be reading an article on how
the share price jumped 7%.

Fluctuations happen in the market every day tech stocks are particular
delicate because it can be harder to predict what is going to happen. If you
look around, you'll notice Amazon dropped 3%, Twitter also dropped 7% (amongst
a few others also down).

We don't know for sure that the acquisition of Oculus even caused the drop.
Although, looking back on previous FB acquisitions you see a drop of investor
confidence as witnessed with the Whatsapp acquisition.

When Facebook announced the $19 billion purchase of Whatsapp their share price
tumbled 4.8%, once again this was a short-lived drop once the fanfare died
down. Facebook know what they are doing. The fact Sony are moving into the VR
space and apparently Valve are also going to be getting in on it signals this
isn't a fad, this is a new-found technology arms race.

He who has the most money wins and at the moment, Facebook have a bit of money
and a good network of investors behind them to propel Oculus to the top of the
VR market and inevitably beat competitors on not only features but the all
important price factor.

 __Edit __: I 've been down-voted. I respect that, but if you're going to
down-vote my argument at least have the audacity to counteract it in the form
of a reply.

~~~
danieltillett
I think it is unfair that you have been down voted, but I think the reason is
your statement that Facebook's management knows what they are doing. I don't
know if they do, but the evidence so far at least looks questionable.

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InclinedPlane
I think the biggest reason behind this is that the Oculus acquisition revealed
how much of a credibility problem facebook has. And that reveals how weakly
facebook's userbase is attached to them, and how easily it can go away.

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pyrrhotech
You have to beta-adjust this. FB is a highly volatile MOMO stock. The market
was down a fair amount today. I am short FB but FB probably would have been
down 3-4% anyway today, so maybe an extra 3% from this second terrible deal of
2014.

I was planning on covering around $50, but given the pattern of the terrible
and immature management decisions lately combined with souring macro
environment, I'm planning on riding this one down to the 20s

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dragonwriter
Financial reporting, where _post hoc ergo propter hoc_ is often the limit of
analysis...

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ceedan
Value of Oculus Rift shares in Facebook just dropped $112M. Ouch.

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suyash
It's about time someone comes with a new and better version of a social media
website. Facebook is now a thing of the past.

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GazNewt
Rubbish.

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jokoon
damn I should invest what my gut opinions tell me

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notastartup

        But investors are clearly spooked by the latest pricey acquisition.
    

ugh. and 17 billion for whatsapp wasn't? I'm just puzzled at how irrational
investor mentality is (herd). Oculus rift should've been a boost, it's far
less riskier than whatsapp.

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WalterSear
So basically, no one likes this deal except Zuckerberg, Carmack and Luckey.

