As the CEO of Learn About The Web Inc., I teach students how to create successful online businesses for a living.
The other day, one of my former students called me and midway through the conversation, she asked a very interesting question. She said "I bought Facebook (NASDAQ:FB) stock really cheap and it's doing great now, what should I look for to decide whether to hold it or sell it?"
It's one of those questions that has multi-dimensional answers.
You could answer it by examining the company's financials and how much debt they hold versus revenue and projections for growth. You could also use the conventional answer which everyone throws out there "if a competitor comes along and is a viable alternative".
Let me start off by saying I actually like Facebook as a company simply because they have been able to gather over a BILLION potential customers. Anyone in my industry can tell you that what they have done is the closest thing to Paradise for an online entrepreneur.
Having said that, it's pretty obvious that the stock is pretty volatile because at any time, those billion people could easily decide to spend their time elsewhere.
I like Vanessa (my former student) so I felt it was important to give her a more practical and usable answer.
I came up with the following five things I would look for when deciding whether or not to hold or sell Facebook stock.
An alternative platform makes Facebook number 2
I think people are looking at the alternative platform problem the wrong way. I don't believe a new sexy platform can wipe Facebook off the map entirely.
They have widely implanted so many API's over the web (likes, recommends, comments, etc.) that this company will be with us for a very long time.
What is more insidious and more likely is that an app could come along and become more interesting and profitable than Facebook and in more practical ways.
A new cooler social app that would be more PROFITABLE by getting users to spend their money online while they still used Facebook to socialize.
That I think would be a very bad sign.
Facebook spends over 10 Billion dollars for another controversial app or company
The acquisition of WhatsApp was a shock to the entire online community. Zuckerberg "went with his gut" and bought the company for $19 Billion dollars.
Investors were spooked but stayed anyway.
I think that Mr. Zuckerberg will never get that benefit of the doubt again.
Unless the acquisition really makes obvious sense, one more large controversial acquisition on Mr. Zuckerberg's part would be a strong sign to sell.
Mr Zuckerberg passes away/leaves or is incapacitated permanently for any reason
As large as Facebook is, I think it is still symbolically driven by Mr. Zuckerberg. I get the sense that investors are not sure where the ship is going but feel good that the boy wonder is here to help figure it out.
If he is gone, I strongly believe investors will bail as fast as possible just in case.
Adults start to leave Facebook
I disagree with conventional wisdom (surprise, surprise) that teens and kids leaving Facebook are a huge problem.
I respectfully submit that adults are more stable and have more disposable income.
If adults start to go elsewhere in droves, that's the real problem.
The number of daily active visitors drops by over 100 million year over year
As of the last earnings report, Facebook reported that they now had 802 million daily active users.
I would respectfully submit that if that number drops to 702 million or less by the same time next year, it's probably time to sell.
This doesn't mean that the company couldn't bounce back and gain those users back and more - rather I respectfully suggest that losing 100 million daily active users would probably be a good data point for an investor exit.
So there they are, my five criteria for holding or selling off Facebook stock.
What do you think? Let me know in the comments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am the CEO of Learn About The Web Inc. (www.learnabouttheweb.com). Learn About The Web™ is an online business education platform dedicated to providing universities with the tools required to credibly teach online business. I teach and discuss online business companies (including Facebook) frequently.