“This company is about to IPO – for $100 Billion … If you follow the insiders you could turn every $1,000 you invest into $1,650 in the exciting weeks ahead.”
That’s the lead-in to the latest pitch from the Oxford Club folks, which, in short, tells us that facebook is going to IPO soon … but that the suckers will rush in to the IPO and lose money by buying at the top, and the smarties (like you and me, naturally), will be making far wiser investments that play off of that facebook enthusiasm.
They’d like you to subscribe to the Oxford Club, naturally, and if you do so they’ll tell you about their favorite ideas for getting rich from this “facebook effect.” Here at Stock Gumshoe, of course, we like to come up with those answers without falling prey to the lust-worthy output of the fine copywriters who toil in the newsletter world.
So let’s try to suss out some answers on our own, shall we?
What follows is the basic foundation of the argument from the shady figure (literally — they shadow his face to make him seem more mysteriou) who signs this letter and who calls himself “Lee McNeal,” a member of the Oxford Club but apparently not one of the analysts who we often hear from in that stable. I have no idea who he is, or whether or not he’s really an expert on silicon valley/venture capital investing.
“In a couple weeks, Facebook will officially become a public company. The next day, founder Mark Zuckerberg will ring the opening bell on the NASDAQ stock exchange. He’ll be worth $21 billion or so.
“And the insiders who got thousands of shares at the ‘grant price’ Facebook set ($29.73 a share) will soon be shopping for Bentleys and boathouses.
“That we all know.
“But the dirty little Silicon Valley secret is:
“On the day Facebook goes public… it will already be fully valued.
“There isn’t a single insider I’ve talked to who believes otherwise…
“If Facebook with its ticker symbol “FB” opens the day at, say, $50 a share, it should end the day at $60, maybe $70.
“Oh sure, it could go higher – because thousands of investors will be scratching at the door, itching to get their hands on some shares at any price…
“But the insiders know ‘FB’ is already ‘FV’ (fully valued).
“Early investors and the bankers squeezed out every penny for themselves – pre-IPO. Every insider knows it.
“Tim Keating, one of Silicon Valley’s sharpest venture capitalists, sees Facebook as ‘quasi-public already’ and its value has been fully realized in the private phase….
“Plenty of insiders will be getting rich from the OVERVALUED Facebook IPO.
“Plenty more insiders will be getting rich from UNDERVALUED companies poised to soar because of the IPO.
“We call these types of undervalued companies “remora stocks.” Like the little remora fish that ride whales and sharks, they stay in the shadows. They enjoy protection from danger. They get fatter and fatter – with almost no effort!”
That’s the pitch, then — suckers will buy facebook shares, but you should buy these “remora stocks” … I don’t know whether or not they’re right about this (Google, after all, was also called “wildly overvalued” when it IPO’d, to the extent that the shares went public at a depressed price of just $85, it’s easy to undervalue a company that has a dominant “mind share” if you’re not sure how the revenue will grow). But I do want to know what picks they’re flacking, so what are our clues?
The first one is a company that they say is “selling shovels to internet miners” …
“the announcement in February that Facebook had officially filed for an IPO sent certain remora stocks soaring.
“Zynga up 16%… Groupon up 7%… LinkedIn up 6%
“Another company shot up that day, as well. Because without this workhorse of a company, many websites like Facebook simply couldn’t operate.
“I’m talking about a company that ‘hosts’ a big chunk of the online party. They basically provide the power that keeps the internet turned on.
“They are doing battle with the likes of Amazon and Microsoft to control the internet power lines…
“And they are moving into position to blow right past these bigger rivals – to become the leading source of power on the internet…
“This company already hosts the websites of more than 100,000 businesses in 100 countries.”
They also are so kind as to show a little chart of this company’s moves, which implies that the stock started trading around $10 in 2008, dipped well below that in the crisis, then climbed dramatically into the mid-$40s in 2011 and, after dipping back a bit, marched still higher this year. So that helps us to be pretty certain that the mighty, mighty Thinkolator is on target when it tells us that this is … Rackspace Hosting (RAX)
We’ve seen Rackspace teased many times before — it pretty much always looks expensive, it’s growing like crazy, and it’s basically a big cloud/hosting server farm company, they manage the servers for thousands of companies (I’ve seen the 100,000 customers/100 countries metrics for RAX before, though both are out of date now — they have 170,000+ customers and have managed to grow their position in big companies too of late, with about half of the Fortune 100 on their client lists now). And yes, the shares did go up a bit in early February when the facebook IPO was filed, though I don’t know why there’d be a particularly tight connection — and pretty much all of the “cloud-related” stocks were going up both before and after the facebook filing.
They try to differentiate themselves with a fast-moving operation that looks to me like it’s easier to manage for small firms and startups (like us at Stock Gumshoe, though we don’t use Rackspace), and with what they call “fanatical service,” but the basic offering (servers, managed servers, managed cloud services) are available from lots and lots of hosting companies. Still very expensive looking, at about 50X what analysts are forecasting for 2013 earnings (and 100X trailing earnings), but sometimes these rapidly growing companies look expensive as they grow for a long, long time — I’m no particular expert on RAX or what helps them stand apart, the last time I commented on this one was back when the Motley Fool Rule Breakers folks (who intentionally only pick stocks that the Street thinks are overvalued) tagged Rackspace as one of their “Kings of Cloud Computing” again back in December.
The second stock they tease as a “remora” is some kind of computer security pick, here’s the basic pitch:
“consider for a moment all the data that this digital activity is creating…
“Mark Zuckerberg says the amount of data we’re generating will keep doubling every year. And he should know!
“He says we’re about to generate 1024 worth of data… [coder slipped up on that one, they meant 1024]
“And all of this data being sent over secure and semi-secure lines is turning into a field day for hackers and other thieves.
“Which is why the next big stock to benefit from the Facebook-led explosion… is a company that keeps all this data safe.
“Your credit card information, a hospital’s private patient files, a company’s intellectual property – all have to be protected.”
And some specifics? Of course!
“… security companies make great investments We already made 37% on Check Point Software in 2012…
“But one Silicon Valley security superstar has latched tightest onto the Facebook whale and locked onto billions in security spending…
“That’s because this security superstar is the Swiss Army knife of network security:
“They combine firewall, spam filtering, Virtual Private Network, and special intruder lock-out systems – all in one handy device.
“In the security business, this approach is called Unified Threat Management. UTM for short. But there’s nothing short about the money being allocated to UTM solutions….
“Rumors started floating in mid-2010 that this security superstar would be acquired by either IBM or HP – and the stock took off on a 231% one-year run.
“When the takeover didn’t materialize, investors cooled at first, but revenues did not. The stock shot back up for a 2-year return of 208%.
“Now with the improving economy, there’s again talk of a takeover. Put that together with the Facebook IPO frenzy and you can see why we expect this stock to continue its stratospheric climb….”
Thinkolator sez: this one is Fortinet (FTNT)
About which I know almost nothing, except that it is indeed in computer and online security, it’s chart does follow the price pattern teased in the ad, and they were rumored to be a takeover target in 2010 by IBM (maybe HP, too, I only remember IBM) at a time when IBM was steadily buying up pretty much every small security company they could find. And it is, like Rackspace, “priced for growth” — which is a nice way of saying it looks pretty expensive even though analysts expect them to keep growing at 20% a year (to be fair, they have handily beaten analyst expectations in each of the past four quarters).
I’m sure Fortinet is intimately connected to facebook, but probably so is every other firewall/security company — facebook is the most visited website in the world, and it’s also one that is actively blocked by many employers who don’t want their employees screwing around, and that is a conduit of some malware and hacking attacks. I’ll certainly stipulate that I think computer security is likely to be a rapidly growing business far into the future, but I don’t own any of the companies largely because I don’t understand them well enough. If you’ve some thoughts on Fortinet, I’m sure we’d all be delighted to hear them, I don’t think I’ve every written about them before. I don’t see how facebook’s IPO will directly impact FTNT or any of its competitors, but if that IPO does reignite investor enthusiasm for tech names in general, well, “why not?”
And one more? Clues are a bit thinner here, but let’s see what we can find:
“… we also identified a third stock that’s lining up for a free ride to profit…
“I’ll go out on a limb and say you’ve probably never heard of this stock, unless you’re an engineer in Silicon Valley…
“In which case you know it, love it, and will keep using its products…
“In fact, computer engineers are forced to use this wholesale supplier’s products in the things they build (which is why we want to own the supplier).
“They make silicon chips – but not just any chips…
“They put an entire computer on a chip. It’s very impressive stuff, but more importantly, just about every electronic gadget made these days needs this chip on-board.
“Cellphones, iPads, HDTVs, modems, routers – all of them need to use these chipsets if they want to play in the social media world led by Facebook. And they do want to play!
“Which is why we believe this chipmaker’s stock is going to keep running up the charts.
“They’ve got customers coming to them from every industry that creates electronic devices: aerospace, defense, broadcast, medical. They already supply chips to more than 20,000 engineering companies around the world….
“And if the Facebook IPO lifts their stock the way we expect, then they’re the third big winner coming your way.”
That’s not a lot of info to go on, so I’m going to leave the Thinkolator in the garage for this one and throw out a Gumshoe guess: I’ll wager he’s teasing Xilinx (XLNX), which is a fabless semiconductor pioneer and developer of many different “system on a chip” designs that run all that kind of stuff teased, including for those industries and many others, and they do claim more than 20,000 customers and they’re certainly not a household name.
And for what it’s worth, they’re quite a bit cheaper than the others — though that’s what you’d expect, since chip stocks tend to be cheaper and are often considered “commodity” product designers, though Xilinx appears to have built at least somewhat of an “ecosystem” around their products and design tools, which should help them with margins. That said, sales dropped this year and analysts see pretty tepid growth for them going forward, so although they’ve also beaten analyst estimates handily over the past year, they’re not the kind of lights-out growth stock like both Fortinet and Rackspace can be. Nothing wrong with that, especially if you pay less for the shares (and XLNX even pays a nice little 2.5% dividend), but, as I said this one is more of a guess.
So … do these three ideas sound like the way you want to “get your share of the biggest IPO in history?”
Facebook will certainly be interesting to watch — and actually, you can get some exposure to facebook directly if you like, pre-IPO, though it will cost you — I know of at least two stocks that have an outsize portion of their value tied up in ownership of facebook shares: the Russian internet company Mail.ru (which I own shares of — trades in London at MAIL and on the pink sheets at MLRUY) is still a reasonable buy here I think and owns more than 1% of facebook, but I’m “talking my book” since I own Mail.ru shares and have mentioned it to the Irregulars in the past; and the closed-end fund Firsthand Technology Value (SVVC). The latter is much easier to buy, but keep in mind that it’s trading at close to a 50% premium to net asset value, which is huge for a closed-end fund, and they’re a venture fund, which means most of their investments won’t pan out…. but they do own 600,000 facebook shares, which will probably be worth roughly $30 million at the IPO (assuming it goes for about $50 per share), and the fund is currently carrying a market cap of about $130 million … facebook is by far its biggest investment and the reason that the shares are trading far above the “gross assets” (as of Mar. 31) of $87 million. There are also several mutual funds and fund families that have built facebook positions over the years, particularly a few Fidelity and T. Rowe Price funds, but none of them have big enough leverage to the name to get much of a bump as a result.
And if you’ve got a favorite play on the mania that might ensue with facebook’s imminent IPO, well, feel free to shout it out — that’s what our friendly little comment box is for below.
P.S. In case you actually read through that whole ad, you might have noticed that they’re also pitching several “special reports” … most of those are things we’ve already covered here at Stock Gumshoe, some many years ago and a few more recently, here are our past sleuthifications of those picks (no guarantees that those picks are still the same as when they first penned these “special reports,” but many publishers do tend to keep them around and unchanged for years):
- The Great Treasure of the Bismarck Sea: How a Tiny Canadian Company Found $63.7 Billion in Gold and Silver…
- The Fredonia Reactor: Earn 1,099% from the World’s Biggest Power Plant…
- The Black Ops Resource: 51 Times More Valuable than Gold… Critical to the U.S. Gov’t…
- Patent Cliff Profits: How to Get Rich From the Drug Company Revolution…