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I have explained numerous times since Facebook (NASDAQ:FB) stock IPO’d at $38 a share in mid May why I think that the shares are on fundamentals worth no more than $7.30. Actually it is pretty hard to put any value on this company as there is just so little visibility of earnings. And for that reason alone I am now slashing my price target from $7.30 to $5. And I think that the shares will head there pretty quickly. This remains a stonking short sell opportunity and here is why.
For those who missed earlier analysis it can be found HERE, HERE and HERE
At a trading level there are two reasons why this stock will tank quickly. The first is that there is no reason for anyone to buy it. Each day there emerges another reason why investors should loathe this company. One some days it is operational metrics ( the advertising scandals and uncertainties or the fact that data released just a month after the IPO showed a decline in the key metric – revenue per user). Other days it is just bad PR (Face book spending $700,000 last year on private jets for founder Mark Zuckerburg). And now we have the insidious drip drip news of early stage investors bailing. Why buy the stock? Why not wait? Against that we have two natural sellers: the early stage investors (who could sell for $1 a share and still make a 100% return) or those who bought since the IPO and suffer now from either ennui or panic or both.
The second reason is those insiders. We have had the first lock in expiry pass and it is quite clear that many if not most of the shares that could be sold post lock in were sold. We have several more and much bigger lock in expiries set to hit before Christmas. There is thus a wave of selling pressure and no buyers.
The most interesting seller after the first lock in expiry was Peter Thiel, the founder of PayPal who was a very early backer of Facebook, is a non exec director of the company and who dumped $400 million of shares, according to a regulatory filing at between $19.27 and $20.69 per share. Having already trousered $640 million on IPO sales the man has turned $500,000 into $1 billion of cash and has now sold 36.8 million shares and holds just 5.6 million. Hell’s teeth, this man is a non exec and he is bailing. Why on earth would anyone buy? Remember the first lock in expiry was for just 271 million shares. The lock-ins that expire before Christmas are for another 2 billion shares.
Now we come to Zuckerburg. I can understand why he needs not to travel on a normal airline. His life would be made hell by moron customers and, these days, by angry shareholders. But that this is becoming the story is worrying. My money is on him seeking to reassure Wall Street by appointing a “professional” CEO and he becoming Life President in charge of development or something similar. I am not sure that will help Facebook in any way but I reckon that he will not be CEO by 2013.
And so to my price target cut. It is simple. I never believed any of the fancy earnings forecasts put about by Wall Street analysts in order to justify price targets of $30-50 to start with. As far as I can see there is no earnings visibility at all. As such I have always valued Facebook on the basis of historic earnings but, being a charitable soul, suggested that it might merit a material premium to the Dow’s Long Term Average. Having assessed everything that has come out since the IPO ( deteriorating metrics, declining brand value, advertising uncertainties, etc) I would now argue that merely trading at the lower end of the Dow’s long term historic average PE is perhaps charitable. As such there are no change to forecasts since I cannot see how one can forecast for this company on a one or two year view in any meaningful manner. Merely an assessment of where it seems to be going justifies a lower rating. At $19.16 the real pain is yet to come. I would keep selling but with a price target cut to $5 from $7.30.
I’ve just had an enjoyable interlude Googling ‘Why Facebook is a good investment’.
Basically, lots of nerds saying that because Facebook is the emotional centre of their lives it must be the centre of everyone’s lives and because Zuckerman is the ultimate cool dude therefore he must be a great guy to invest in.
And these are the people writing articles for the Wall Street Journal!
http://online.wsj.com/article/SB10001424052702303879604577412610568852458.html
According to Nobel prize winning economist George Akerlof ‘Facebook, he says, “enhances your identity” and is “an advertisement to the wider world of how you are defining yourself.” ‘
According to Fil Zucchi is the founder and manager of Zebra Investment Advisors LLC, a Virginia registered investment advisor, and Zebra Fund, LLC, a long/short hedge fund, Facebook is a hot BUY, because his 16 year old daughter spends a lot of time on it.
http://www.minyanville.com/sectors/technology/articles/facebook-facebook-ipo-facebook-valuation-facebook/5/17/2012/id/41047?page=full
So much investment, even from the ‘professionals’ is clearly just emotion and prejudice dressed up with some rationalisations. Scary.
Doing what you are best at Tom, picking shares to go down. Best read before being censored by advfn again.
Bob
And you are doing what you are best at. Churning out the same old stuff. If you think I am always wrong how about you go and fill your boots with Facebook shares? If you are that convinced you should leverage up to the gills and just buy every Facebook share you can. Go on … put your money where your mouth is?
Best wishes
Tom
Bob
And just for the record, I said FB was a sell at $38 when it listed. So far it has halved in three months. That is, as such, not a teribly bad call is it. Meanwhile you can if you wish check out my 12 year record at http://www.t1ps.com on the long tack and it too is rather good. But why let facts get in the way of your daily vent?
Best wishes once again
Let us know how you get on with your leveraged mega purchase of FB shares….
Tom
I said you were wrong about Facebook where? I think they will fall and said so in my post. Keep up Tom.