Facebook is a sucker’s stock.
Why do I say that?
The media hyped it. And the only folks who seem to be itching to snatch it up are the inexperienced stock investors.
All my friends who aren’t stock investors are the ones who were looking to potentially buy it. All of my other friends who have a ton of years in the financial industry all shunned it. It’s simply overpriced.
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There’s a reason why. Professionals in the industry know how this all works.
For starters, the pros who did want some shares of Facebook got it years ago (as early as 2009) through SharesPost or SecondMarket Holdings, which are ways that accredited investors can own positions of private-company stock.
So the ones who wanted it already had it…and at a much more favorable price than the IPO price.
Secondly, the underwriters of Facebook’s stock increased the number of shares available by about 25 percent, or about 100 million shares. Well, that just cut up the overall pie into much smaller pieces and that’s not good for the individual investor.
Thirdly, Goldman Sachs, Tiger Global Management and others decided to sell half of their positions as it debuted in public.
So the “smart money” is selling it at a time when the hype is so huge that the “dumb money” will want to take it off of their hands.
If Goldman thought it was such a great deal then they wouldn’t be cashing out of 50 percent of their holdings in Facebook. So the “big boys” are selling and only the inexperienced investor is trying to snatch it up. That should tell us all we need to know right there.
But there are other concerns that I have with Facebook as a stock. For instance, its revenue per monthly user is declining.
For instance, back in the fourth quarter of 2010, Facebook earned $1.20 of revenue per monthly user. In Q4 of 2011, that rose to $1.34. But in the first quarter of 2012, it’s down to $1.17. So the revenue is dropping off. That’s a concern of mine.
Also, it’s price-to-sales (P/S) is way to high. My buddy, Michael Carr, had this to say about that:
At the offering price, the P/S ratio on Facebook should be about 26.
Historically, the top 5 percent of P/S ratios has been about 12.2 and companies reaching this level of overvaluation have underperformed badly over the next five years. Almost all companies (more than 1,400 since 1986) with P/S ratios greater than 12.2 were small companies.
Since 1986, about two dozen companies with sales over $1 billion have reached the lofty level that Facebook will be at and almost all of them underperformed the market over the next one and five years. The half dozen that did not underperform matched the market and that was during a bear market so they still lost money.
Because of the lofty P/S ratio, FB cannot meet investor expectations unless sales top $1 trillion in 10 years. Fundamentally, the stock is doomed.
I couldn’t have said that better.
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Besides Facebook being over-hyped, over-priced and too many shares outstanding, Facebook has no real success at selling to its 900 million users per month.
People don’t go there to “buy” like they do on Amazon, eBay or even Apple’s iTunes. No, they go there to connect and chat with friends.
In fact, this past week, GM has been honest enough to say that Facebook ads simply aren’t working.
And the new revenue ideas that they have are stupid too. For instance, in New Zealand, Facebook is testing something called “Highlight,” which charges NZ$2 (US$1.50) to be sure your friends see a post of yours. This way it doesn’t get pushed down in the news feed, etc.
But honestly, if you want to make sure your friends see something from you…email them or Facebook Message them for free!
I believe there’s a reason why Facebook traded over half a billion shares on its first day of trading and essentially went nowhere. It’s because it’s going to be hard to push this stock up from its overvalued levels. You’re going to have to find a “bigger sucker” to take it off of your hands.
That could happen for a bit in the near-term but over time, it’s not going to be sustainable.
But in the near-term, the market makers in Facebook stock can temporarily keep it propped up like they did Friday.
At one point, once Facebook had sunk to its IPO price the market makers were buying at $38 to the tune of 11-to-1. So they were almost all on the “buy side” to keep this stock from looking like a failure on “Day 1” or else it would have fallen below its IPO price by the end of Friday’s trading session.
Keep in mind that IPOs can go on a wild ride…and the ones that get overhyped are the ones that usually start out overpriced and have a hard time regaining those lofty levels afterward.
A key example of this is LinkedIn’s stock (LNKD). It has never regained its intraday high on its IPO day even until this day (almost a year later).
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So don’t buy the hype. There are better places for your money.
Look, I love Facebook. I’ve reconnected with friends and family that I haven’t seen in years. But just because I like a concept doesn’t mean that it makes it a “good business.”
Facebook isn't a good business even though it is a great “social connecting” idea.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.
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