Arrington Is Dead Wrong About Facebook’s “Bubble Like” Price

The last month has seen a dramatic 40% increase in the price of Facebook shares on the private market to $50 a share, reflecting a $25 billion market cap.  In a TechCrunch blog post earlier this week, Michael Arrington wrote about this price rise and cited the “tightening supply” as a partial explanation for the “bubble like price increase in Facebook stock”.  As a result of the economics courses we took in college, we have a keen appreciation that prices are driven by supply and demand.  While we note that Facebook has long looked warily on the secondary market in its shares, negatively impacting the liquidity, our larger point here is Michael’s assertion that the price rise is a “bubble”.

When we published our report valuing Facebook at $50 billion, we based our price target on fundamental research.  We believed that the shares were markedly undervalued in the private market for a number of reasons, not least was the lack of quality research providing an informed valuation.  We were confident that if the market was provided with thoughtful information, the share price would react accordingly.  While we don’t take full credit for the run up in Facebook shares over the last month, as Facebook continues to make meaningful progress, we certainly feel we played a part in the shares beginning to approach our view of fair value.  So while TechCrunch sees a bubble, SecondShares sees a private market that is woefully short of useful investor information, and responds accordingly when that information is provided.   Where they see a bubble, SecondShares sees companies like Facebook that are changing the world in fundamental ways and creating massive shareholder value.  Where they see a bubble resulting from constricted supply, SecondShares sees a market where prices are low because of a lack of buyers.  We believe that markedly less than 1% of the potential accredited investors on the planet are even aware of the fact that they could buy shares in Facebook on the private market.  So while there is constriction on the supply side, the demand side is even more nascent.

We look forward to providing the market with our views, and to providing a platform for others in our community with informed opinions to share their views with our growing audience for finance related information on the companies driving the social media revolution.   We also look forward to continuing to call out, even the well informed, like Michael Arrington, who have done zero financial analysis to understand a company’s true value, but feel comfortable leveraging their platform calling prices a “bubble”.  IPOs and mergers have been the traditional exits for shareholders.  The second market is providing the third exit for employees, founders, angels, and VC’s to monetize their investments, and its just beginning to open.  We appreciate why Facebook and other companies are wary of this new market.  But the genie is out of the bottle, and over time, Facebook and others will see the enormous value the secondary market will bring to their companies, investors and employees.   We look forward to being along for that ride.  Arrington will get it right eventually.

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