Facecooked, Faceplant, and Facecracked – we’ve all heard the jokes – but Facebook (NASDAQ:FB) shareholders aren’t laughing.
Since its IPO closing price on May 18, Facebook 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 (NASDAQ:AAPL) and 15 for Google (NASDAQ:GOOG). Translation: Despite FB’s share decline, it’s still in nosebleed territory.
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 selling: 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 leaving.
Massive share oversupply because of expiring lockups: 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 million shares!
Relative Underperformance: Compared to its peer group of technology ETFs (NYSE:XLK) Facebook, along with other social networking stocks (NYSE:SOCL), have badly underperformed. LinkedIn (NYSE:LNKD) 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 (NASDAQ:QQQ).” The Nasdaq subsequently declined around 9% and bottomed at $60.41 in early June, before regaining lost ground.