Sorry…Facebook (Nasdaq: FB) is Still Only Worth $7.50 a Share

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The technorati took me to task. So did Wall Street.

They were agitated by an article I wrote in May explaining why the world's most hotly anticipated IPO, Facebook (Nasdaq:FB), was worth a mere $7.50 a share at best.

"Out of touch," one of the critics said. A "luddite" charged another.

"Doesn't grasp the significance of so many users," one Wall Street insider opined–who happened not coincidentally to work for one of Facebook's investment bankers.

Since then the social media darling has fallen another 31% to nearly $22 a share. Ten weeks later, Team Hoodie hasn't done much to merit an upgrade either.

Sorry guys…Facebook is still only worth $7.50 a share – likely less.

Here's why.

The Cold, Hard Facts for Facebook

At the time I reasoned that Facebook's valuation simply didn't merit the 100 times earnings IPO price of $38 a share based on comparable figures from Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL).

But there were a host of other factors as well.

I cited falling revenues, a lack of control over the mobile market channel, increasing distrust from customers who were voting with their feet and the concurrent departure of major advertisers like GM which will cost Facebook an estimated $10 million a year in revenue alone.

I also posited the assumption that Facebook would be unable to maintain the 100% plus growth that many investors believed was baked into the proverbial cake.

Google couldn't. Apple couldn't. And both of them are real businesses.

That's the key…real businesses.

Fact is, Facebook still hasn't figured out what it wants to be when it grows up.

Despite the fact that CEO Mark Zuckerberg does have some excellent advisors, the company isn't going to be able to hide the fact that its "business" is nothing more than a colossal time-wasting collection of personal interest items for much longer.

Other problems abound, too. All of them point to a lower share price.

For instance, Team Hoodie seems more intent on creating new applications than they do on making money from customers. There seems to be a disconnect between what's cool and what actually makes money.

Take the recently unveiled tablet-based Facebook application for example.

Sure, it gets Facebook on a mobile device but there's no plan I can discern for how the application creates a different experience nor how it will generate money from all those eyeballs.

Then there's the Facebook phone. First it's happening, then it's not. This suggests that Team Hoodie may have serious internal strategy battles and be fraying around the edges.

Facebook's "Fiscal Cliff"

Call me crazy, but I think Facebook's numbers reflect this already.

One quarter into its public life, Facebook's net income dropped by $295 million to a loss of $157 million.

The cost of customer acquisition is going up so that's clearly digging into its bottom line.

So is the way the company chose to account for stock-based pay in adjusted earnings. Had management not chosen to exclude stock-based pay, the loss may have been orders of magnitude worse.

And finally, Facebook has its own fiscal cliff of sorts.

The 91-day lock up period imposed on employees and company insiders following Facebook's IPO expires later this month. That means another 268 million shares could come up for sale further depressing the value of the 2.1 million shares already outstanding.

With the stock now off $16 from its $38 IPO price there's definitely an incentive to sell. A large number of employees are probably anxious to get out before the markets destroy their windfall gains. I know I would be.

As the chart below shows, former employees have already hit the dislike button and sold.

Figure 1: Source: SecondMarket, Inc.

Call me a skeptic but I find it especially convenient and more than a little coincidental that 79% of the total Facebook-related market volume comes from former employees and 86% of the total Facebook-related transactions come from the same group.

Investors are the next biggest group of sellers by total dollar volume accounting for 12.4% of the total and 4.8% of the number of sellers. Perhaps they haven't given up the ghost yet.

Either way, the chart is kind of scary when you consider the exponential growth associated with Facebook stock sales because the old adage certainly applies. What goes up, must come down.

Don't get Zuckered again. The clever folks are the ones who already sold.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Stephan Attia | August 7, 2012

    How pessimistic. But here is the truth. There is a bigger chance for a third world war than for facebook to fail the stock market.
    What comes down bounces back up. And it is already happening. I believe Facebook will cross the 100 dollars share within the next two years. It has a great potential.

    • Guilherme | August 8, 2012

      Sell everything and buy FB then. If you are such a believer in your "$100 in 24 months". In fact, this is better then lotto, considering that in "six months" its value is the half of the IPO.

      Personally, by my "user-wisdom", I believe FB is not a long-term business. Google+ (that anybody uses – YET – I consider it) will take its place and swallow FB in the next years.

      Why I think in this way? Take a look at the Android users – that almost unimportant "REAL BUSINESS" thing ;)

  2. Werner | August 7, 2012

    I can only agree with Keith. As to the 3rd world war Stephan Attia is talking about, it most likely will be at the USA's initiative, wiping out most of the world US an Facebook alike.
    Facbook is the same scan as the dotcom scandal was.

  3. b.j. edmonds | August 7, 2012

    Good article, but I dont think you are pessimistic enough.How can this company possibly regain public confidence and backing? Who in their right mind would believe any of their,or their bankers, forecasts in future?Worth seven dollars a share my foot, more like seven cents—-Regards, b.j.e.

  4. Kyle | August 7, 2012

    @Stephan Attia. FB would never hit 100 a share. This is an absured number. It is the largest player in the social media bubble. get ready for a huge crash probably down to just above 10 a share.
    I am long on puts.

    • Werner | August 17, 2012

      To Kyle
      I am in the same boat as you for November, but my position is not too big. A share price of USD 10.00 by then, would still make me a more than decent profit.
      Good luck to you (and me).

  5. fallingman | August 7, 2012

    Word has it that Facebook is using bots to create phony hits on advertiser websites. Only 20% of hits appear to be legit. No idea whether this has any basis in fact. As in none, but if it is, that's fraud, and while this kind of thing is never prosecuted anymore, after a while advertisers realize they aren't getting the expected bang for the buck and either pull out or demand lower rates.

    I have no position in FB either way, but this crew seems sleazy enough to me to pull a move like this.

  6. Hoodie | August 8, 2012

    Stephan Attia you are an idiot!!! 100 per share in the next 2 years??? What are you smoking over there?

    I am long on the put options myself.

    The fad is over – everyone is just waiting for the next FB to come along.

  7. Andrew H. | August 11, 2012

    Hi everyone :)

    Just 2 things…
    1. I agree that FB is a great candidate for shorting or some puts, but don't forget that the markets, especially these days, are not very rational, quiet the opposite! With all that hype, HFT, big institutional investors (pushing the stock) and the general madness of the markets it IS possible that will see a (small/medium/large?) rally in FB before it inevitably fails and crashes.
    "You can fool some of the people all of the time, all people some of the time, but never all of the people all of the time." ;)
    2. Does anybody know the date of the end of the quiet period for FB? Shouldn't be long but I don't know the exact date. Thanx. :)
    Ad lucrum per sapientia

  8. Lowell Hussey | August 21, 2012

    The 2 numbers that are probably good to watch are ad revenues per user/minute and growth [or shrinkage] in user minutes. Just like TV's CPM's and Ratings.
    I think everyone has largely digested that FB's growthy in ad-rev/user-minute is pretty meager and extremely disappointing. But when we all begin to notice that the user minutes per member are shrinking, from diminished novelty factor as well as more competition for users' time, that's when the stock price will head for points way-south.

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