I promised I would write more in an earlier post, so I hope I do not disappoint with this short piece. I just read something that made my jaw drop. The offender once again is Stifel Nicolaus (Probably the same one who likes Twitter based on EV/EBITDA/G versus comps). I like Stifel and find their research to be on the better end of the sell side space, but I also like to call a spade a spade. Enter… Facebook Inc (NASDAQ:FB), which just decided to buy Oculus For $2 Billion.
What is Oculus? Some virtual gaming company. How much did Facebook Inc (NASDAQ: FB) pay? $2 billion. How much does Oculus make? No idea but guessing its negative, however, one must remember that it is different this time, after all it is
Anyway, I was curious what the sell side cheerleaders would say about the purchase. Here is an image from a Stifel report which just came out, and the executive summary is a must read.
Let us do this one in simple english. Facebook Inc (NASDAQ:FB) is buying a virtual reality company for $2 billion. This is a tiny amount for a large company, says Stifel (even though it is about 20% of the company’s cash, although the company is mostly financing the deal through equity, do you consider 20% of your assets petty cash?) I am not the only one unfamiliar with this company, even the Stifel analysts who cover tech do not know much about it. The purchase is ‘experimental’, ‘aggressive’, ‘bold’, ‘speculative’, but it is only $2 billion, so what?
However, this line is the kicker “our take: in order for Facebook to feel comfortable being this aggressive/bold/speculative, the growth of its core advertising platform must be extraordinarily strong.”
Let us think this out. Stifel is saying that the purchase is speculative but since Facebook made the purchase it must be that the company’s core business is strong. Does that make a lot of sense? To me that sounds like saying someone who uses $100 bills to start their fireplace must be smart and rich. That is the case sometimes, but there are other factors i.e. the person could be crazy, on drugs, etc.
Even without using an extreme example I think the point is clear. It makes no sense to say the acquisition by Facebook Inc (NASDAQ:FB) is good because otherwise it would not have been pursued. Besides the logical angle, there are many historical examples to back this up – see AOL Time Warner for an extreme one.
What is the rest of the sell side saying? So far only a few reports are out, and most are neutral on the deal. All the big firms will be releasing reports about the deal in the coming 12 hours and will try to sound smart(er than Stifel). As always, investors would be wise to read them with a grain of salt.