With Facebook (FB) stock trading well over $100 and its market capitalization exceeding $300 billion, it should come as no surprise that insiders are starting to sell stock.
There’s a strong case to be made that FB stock owners should take profits and walk away after company insiders unloaded stock over the last month. Let’s explore the reasons why.
Insider Sales Are Mostly Insignificant
In early November, long-time FB stock investor, and board member Marc Andreessen sold nearly three-quarters of his Facebook stake for $160 million. Then, most recently, WhatsApp’s CEO Jan Koum unloaded $274 million worth of Facebook stock.
Combined, these two insiders sold stock that amounted to less than 0.15% of Facebook’s market capitalization. Furthermore, Koum owns FB stock valued at roughly $7 billion, with him being the single biggest beneficiary from Facebook’s acquisition of WhatsApp.
The bottom line is that Koum and Andreessen’s insider activity is not too significant when you consider the market capitalization of FB.
However, this lack of significance does not mean that investors shouldn’t take notice and consider taking profits in a very stretched Facebook stock price.
FB Stock Vs. What Facebook Will Become
There’s no question that Facebook is a great company, one that will continue to grow fast. During its last quarter, Facebook saw a 61% increase in ad prices year-over-year to generate a whopping $4.3 billion in Q3 ad revenue. In addition to that, FB ended the quarter with 1.55 billion monthly active users, by far the largest network in the globe.
With that said, FB may have the largest network, and may still have a great opportunity to grow larger via advertising, payments, video, hosting content, internet search, virtual reality and as an internet service provider. However, FB must still capitalize on these opportunities.
With less than $16 billion in trailing 12-month revenue, there’s no question that much, if not most, of the Facebook stock value is tied to speculation, and what it could ultimately become. As a reference, Alphabet (GOOG, GOOGL) has a market capitalization of $535 billion.
While Alphabet stock is arguably inflated itself, with a price-to-earnings ratio of 32, even an expensive GOOGL looks cheap compared to Facebook stock.
Alphabet has 60,000 employees, five times more than Facebook’s 12,000. Also, Alphabet has well over $70 billion in trailing 12-month revenue, 4.4 times higher than Facebook’s revenue during the same period. Yet, despite being many times larger, and also trading at a lofty valuation multiple, GOOGL is only 75% more valuable than FB stock!
Follow Insiders and Sell FB Stock
As a result, investors are wise to follow insiders out of Facebook stock, and this takes nothing from the greatness of FB as a company. Yes, Facebook is still going to grow much larger, and yes, FB stock has been a terrific investment up until this point. However, sooner or later its valuation will come under scrutiny and investors will realize that FB is priced for absolute perfection with minimal upside.
Therefore, FB stock owners should not expect too much upside from this point forward. In retrospect, Facebook’s revenue could double and its $105 stock price would still be too expensive. This suggests that Facebook stock either will trade stagnant long-term, might stay in a wide trading range as its company grows larger, or could tumble.
Personally, I’d be surprised to see Facebook tumble because it has so many opportunities to find growth. If it misses on one of those opportunities, like payments or monetizing WhatsApp, that could spark a reverse in sentiment that takes the stock much lower.
Regardless, it is almost impossible to imagine that Facebook stock will go much higher, and that’s why investors should take profits.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
