Facecooked, Faceplant, and Facecracked - we've all heard the
jokes - but Facebook shareholders aren't laughing.
Since its IPO closing price on May 18, Facebook (NasdaqGS: FB)
shares have sunk more than half in value. (For Benjamin Graham
disciples, that means Facebook probably has another half to fall
before reaching fair value.)
At current prices, FB shares still trade at roughly 41x EPS for
2012 compared to a fiscal P/E of 12 for Apple and 15 for Google.
Translation: Despite FB's share decline, it's still in nosebleed
And so it is...the most overhyped initial public offering (IPO)
in the history of mankind is officially in a bear market. But is
Facebook at current prices a bargain?
Here are immediate hurdles facing* Facebook shareholders:
Mobile usage is hurting Website traffic:
Around 23% more of Facebook's mobile users are bypassing its
Website compared to the previous quarter. And since Facebook can't
hit mobile users with the same kind of revenue generating
advertisements that appear on its Website, it loses money on users
that convert to mobile.
Institutional investors and fund managers are
21 mutual funds managed by Fidelity Investments sold 1.9
million Facebook shares during Q2. The Fidelity Puritan fund
(Nasdaq: FPURX), sold more than 623,000 shares, or one-fourth of
its Facebook stake. Other large sellers included Fidelity
Disciplined Equity (Nasdaq: FDEQX), which sold more than 444,000
shares, or almost half its ownership stake.
Fidelity is not alone and other managers like Oppenheimer Funds
and Turner Investment Partners followed along. While the
holding period for a stock among institutional investors can vary,
it's usually much longer than one or two months.
Employee Retention is becoming an issue:
A rising stock price attracts and retains employees, but the
opposite effect is true when a company's share price slides. For
Facebook, a lackluster stock price gives employees and top
management less incentive to stay on board. Since its May IPO,
Facebook has already lost three high profile executives, including
Katie Mitic and Ethan Beard, who announced on August 2 they're
Massive share oversupply because of expiring
Almost 2 billion more Facebook shares, representing around 70% of
the company's total shares outstanding, will be eligible for sale
by the end of this year. (See chart below) Perspective: Facebook
shares have averaged 3-month daily trading volume of just 48
Compared to its peer group of technology
(NYSEArca: XLK) Facebook, along with other social networking stocks
(NYSEArca: SOCL), have badly underperformed. LinkedIn (
) is one of the rare exceptions.
From the start, Facebook's $100 billion IPO valuation was
ridiculous and gave public shareholders very little chance of ever
experiencing the same sort of outstanding returns experienced by
its pre-IPO investors. By comparison, Google's IPO was valued at
just $27 billion.
Despite these red flags, Wall Street's cheerleaders were telling
you to buy Facebook.
On his blog, Mark Cuban, owner of the Dallas Mavericks, called
Facebook "the most important IPO to ever hit the stock market."
Several Wall Street analysts, like Sterne Agee and Wedbush,
initiated "buys" on Facebook even before it went public.
In contrast, the ETF Profit Strategy Newsletter correctly went
against the crowd and panned Facebook shares from the very
beginning. Our May 3 subscriber alert, warned that "Facebook's IPO
could very well coincide with a short-term top in the Nasdaq-100
Index (NasdaqGM QQQ)." The Nasdaq subsequently declined around 9%
and bottomed at $60.41 in early June, before regaining lost
Ongoing technical analysis and market forecasts for major U.S.
indexes, gold, silver, euro and the dollar are provided via the
Profit Strategy Newsletter's