- Suddenly nearly everybody is bullish at historic highs. Where were they at the post-IPO lows?
- Facebook is priced for beyond perfection at 94 times earnings and 24 times sales.
- Original VC Peter Thiel cashes out his remaining 494,950 shares on July 29, signaling a smart money top.
There have been so many ridiculously bullish articles on Facebook (NASDAQ:FB) lately that I don't even know where to start. We have Alex Cho comparing Facebook to Google (NASDAQ:GOOG), something that sounds great on paper but is baffling to anybody who works in computer science. Markos Kaminis calls it a "bargain" on a PEG value basis, a calculation only a diehard idealist could fathom. Jefferey Himelson has written 8 bullish Facebook articles since July 1. His most recent one talks about the great opportunities for Facebook in Africa, the poorest region on Earth. Sramana Mitra writes that "Nothing Can Stop Facebook Now" in an article that cites a number of prevailing digital trends and Facebook's exposure to these in order to conclude that it must be a great investment. Seeking Profits suggests that Facebook should be trading at 40 times FY2015 earnings, which is an unusual way to value a stock halfway through 2014. The Value Investor acknowledges that Facebook's valuation is "astonishingly expensive" but goes on to write a very optimistic piece saying one only needs "imagination" to justify the current price.
The reason that I selected these articles are that they share a single thing in common. That is, despite being overwhelmingly bullish, none of the authors are long Facebook. To me that is a tad bit puzzling. If the Facebook story is so great and the shares offer such an extraordinary amount of unlocked value, then why not buy some? There is no doubt that Facebook stock is one of the most popular around. In fact over 94,000 Seeking Alpha members signed up for real-time alerts on the FB ticker. Facebook is the ultimate fanboy stock after all. And as a contrarian I look for opportunities to fade popularity. I'll go out on a limb and predict that the comments to follow this article will be casting me in an unpopular light for raining on the parade. It is human nature to embrace a good rah-rah story like Facebook and cheer it up.
I like to deal with reality, and I'm going to play the bear card. As a post-IPO Facebook bull when it was trading in the teens, I did not have many people siding with me at that point. What a dismal point in the market when social media was written off for good. How quickly we have done a complete 180 to the other extreme. These extremes hardly ever last, fair value will be reached somewhere in the middle between them. The story in 2012 was essentially that growth was slowing. Nothing has really changed other than public sentiment as growth is projected to slow in to 2015. Analysts expect the 55% FY2014 sales growth to decrease to only 34% for 2015. Clearly this year is an anomaly for Facebook as there was a one-time secular breakthrough in mobile monetization. Now when growth further slows from a projected 34% to what I would consider to be a more realistic projected 15-25% for 2016, I bet that the sentiment starts to shift negative again and the fanboys will be in a race to the exit. I like to front run the sentiment shift and as such I have positioned myself short at $76 the morning after the last earnings release. This is a classic sentiment top and a great short entry.
Right now Facebook is priced at 94 times earnings and 24 times sales. I believe that the company is likely to disappoint the insanely lofty expectations no matter what happens. In one of the rare bearish articles on Facebook, Stone Fox Capital argues that the core business is in a state of decline. He is completely right. Growth hope necessary to sustain the airy current market valuation is pinned on a bunch of "wild cards" that are yet to be proven to be monetizable. Key user metrics like MAUs and DAUs are suspiciously elevated in the face of negative consumer surveys regarding use of the core social platform. Furthermore, it is not even clear if Facebook ever really intends to monetize certain business segments like WhatsApp. Indeed I'm getting the sinking feeling that within a year sentiment will shift negative and the market will price this in very rapidly. I think that Facebook will inevitably trade down somewhere below the IPO price and above the historic lows in the teens. That is my target to cover my short.
If there is one core investment principle that I live by it is always follow the money, the smart money that is. One guy - the insider of all insiders - has played Facebook stock nearly perfectly from the beginning. Peter Thiel was Facebook's first outside investor and director. He was deeply involved with the company strategy and financing before most people ever heard of social networking. Thiel is smart money. He knew when to get in and he also knows when to get out. Following the Q2 earnings, Thiel sold all of his remaining shares. Obviously he does not believe that the stock has much room to appreciate from the current elevated valuation. On the other side of the fence you have the fanboys who tell you that it is going higher for a number of reasons based on wild speculation and assumptions. Seeking Alpha founder David Jackson illustrates this point well in a recent article about the wrath inflicted on short sellers. Do not be blinded by the fanboys, get short Facebook before the sentiment inevitably shifts back to negative.