Market Overview

Mark Cuban Bought Nearly $5 Million in Facebook Stock!

In a blog post from yesterday, Mark Cuban revealed that he bought just under $5 million in Facebook (NASDAQ: FB) stock. Specifically, the Dallas Mavericks owner said that he bought three 50,000 share blocks of FB at $33.00, $31.97, and $32.50. Cuban wrote, "Its a trade, not an investment. Kind of like buying a Mickey Mantle, a Hank Aaron and a Barry Bonds Rookie Card knowing there is a card show in town next week."

His explanation for the trade was a little cryptic for a number of reasons. First, in his post, Cuban doesn't have very many good things to say about Facebook. He notes that the disastrous IPO will be seen as another reason for the retail investor to leave the stock market.

Specifically, Cuban opines, "Whatever positive impression they had of the IPO market and the stock market in general was just torched to the ground. When everyone you know associated with the stock market is telling you and the media is confirming that this could be a huge IPO that will make money for those lucky enough to get shares and the opposite happens, goodnight."

He then argues that the valuation bubble in Silicon Valley is now bursting. He explains, however, that it is not a result of reasons that most people believe or even understand. According to Cuban, the rise of marketplaces for private stock such as SecondMarket and SharesPost are having a negative impact on the IPO market.

He explains that demand for shares on these secondary markets was very high, and because there were few shares to go around, the price kept going up. Furthermore, "when it was time to go public the IPO had to be priced higher than the prevailing share price on the secondary market." Making matters worse, "those folks who bought shares in the secondary private market, driving up the share price now had the shares they wanted to buy , so they were no longer going to be the buyers the IPO counted on to eat up shares in the open market."

These market mechanics combined with the massive number of shares sold in the IPO, created a situation where supply simply outstripped demand in the Facebook IPO. Hence, the stock is at $32.41 versus the deal price of $38.00. The IPO has been more or less a disaster. Mark Cuban's explanation - supply and demand - is the right one. In his own blog post, CNBC's Jon Najarian agrees, as well. Najarian also elaborates on the evolving IPO space in light of new secondary markets.

In the second half of his posting, Cuban touches on another issue related to Facebook - the trend towards mobile internet usage, and how that affects Facebook, Google, and other companies that rely on advertising revenue. Basically, Cuban argues that if you believe that mobile will replace a large percentage of PC online usage you should short Google (NASDAQ: GOOG) and other ad plays because they are not able to generate the same type of ad revenue through mobile browsing as opposed to a PC browser.

He quotes Kleiner Perkins Caufield & Byers' Matt Murphy who argues that “People see this modality of consumption shifting from the PC to mobile. On top of that, mobile feels like it's much more the kind of wide open that anybody can win kind of arena.” Cuban himself doesn't seem entirely convinced that a dramatic shift is about to take place from PC usage to mobile, but he does acknowledge that it is a concern for Facebook, Google, and other prominent ad display companies.

What is important here, however, is that he does not outline his thesis in any specific way for why he bought Facebook stock. If anything, he sounds like a skeptic, which he readily admits he is regarding the stock market. In fact, in other blog postings he freely calls the stock market a "Ponzi Scheme." BUT - and this is important - in his writings on the stock market, Cuban also admits that "I've traded stocks for almost twenty years now. IM good at it. When i work at it. And it takes a lot of work."

Furthermore, he offers one very basic tip about trading stocks. He writes, "If you are going to trade stocks, you just have to follow one rule and remember one thing. That rule is always have a definite knowledge advantage about the company you are trading, and always remember that every stock transaction has a sucker, and you have to know whether its you or the person on the other side of the trade."

What we can determine from this is that Mark Cuban clearly thinks he has some sort of angle on Facebook that leads him to believe his trade will be profitable. Although it is unclear exactly what that is, there are a few possibilities.

First, Cuban may just be looking at Facebook from a speculative risk/reward perspective. This is very likely. In his writings, he argues that it is basically impossible to value a non-dividend paying stock and that these equities are definitely not investments. He also says that the FB buy is a trade and not an investment. Therefore, we know he is looking at it from a speculative point of view. Given the hype that continues to surround this company, there is certainly potential upside in FB shares from current levels. In order to make a calculated bet on this upside, Cuban would have just had to determine at what price he would exit his trade if it went against him and then evaluate that amount of risk versus what he deems to be FB's near-term upside.

The other potential possibility for why Cuban believes he has some sort of edge is because of his extensive technology industry knowledge. While it is hard to imagine that Cuban is privy to specific knowledge about Facebook that is so material that it could substantially move the price of the stock, he is more qualified than most to evaluate the risk/reward in light of his background.

The third possibility is that Cuban reacted to the fact that technical glitches at Nasdaq last Friday may have triggered artificial selling pressure in FB earlier this week by investors who were hoping to be eligible to file a claim with the exchange. Under this scenario, this artificial selling pressure may have driven the stock below where it would trade once conditions normalize - and this is what drove Cuban to act.

In any event, the Mavericks owner is basically breakeven at this point on his trade. According to the prices he revealed on his blog, his average purchase price was $32.49. At last check, FB was trading at $32.41. We will be watching closely to see how this one turns out!

Posted-In: News Movers & Shakers Psychology Topics IPOs Events Success Stories General Best of Benzinga

 

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