MorningWord 3/26/14: Daft Punk is Playing at Zuck’s House – $FB, $TWTR

by Dan March 26, 2014 10:06 am • Commentary

To state the obvious, Social Media stocks have had a tough week, exhibiting very poor relative performance, as the S&P is still near another new high today.

Investors’ reaction to Facebook’s $2 billion acquisition of Oculus, or what my partner CC just referred to as “the company that makes Daft Punk’s helmets”, should be very telling.  FB has been down about 11% since making a new all time high just a couple weeks ago heading into last night’s announcement.

If I were a FB investor (which I am not, I actually have a short biased trade on here), these are not the sort of acquisitions that would make me too happy.  To be fair, I think it is great that FB is aggressive about integrating other technologies into theirs, and in hindsight the Instagram buy was very smart, but the WhatsApp price started to get people thinking. And now we have the Oculus. By paying $2 billion for a hardware company with $25 million in 2013 sales and 75,000 orders for their product, they are obviously just treating their stock like those shiny coins at Chuck E Cheese.  I am sure they have a plan for their acquisition spree, but one dilutive multi-billion deal after another has the potential to really hurt shareholders in the event that those acquisitions don’t contribute to earnings or sales in the coming years.

Speaking of stock declines, TWTR continues its massive under-performance, down 24% on the year and down 35% from the all time highs in December.  With the company’s 474 million share lock up looming on May 6th, I am hard pressed to think that the stock could rally in any significant way ahead of it.  With so few insiders being able to sell on the November IPO, I have to assume that there will be an onslaught of sellers with the stock above $4o considering the stock IPO’d at $26.  I suspect that the company’s bankers will want to manage this process and possibly look to hold a secondary offering due to the potential quantity of shares (remember the IPO was only 80 million shares).  TWTR will want to make some sort of positive noise prior to the lock-up expiration and get their stock up a bit to help absorb some of the selling pressure.  Maybe they need to take a page out of Zuck’s book and send a cryptic invite for a media event for some new product launch, or use their own funny money stock currency to make a multi-billion dollar acquisition of some college drop out’s new-found future saver!