We feel that the coming dilution in Facebook shares this week is an undeniable negative. In fact, David Faber reported Friday on CNBC that Facebook (FB) CFO was engaging with lead bank JPMorgan (JPM) a road-show to "reconnect" with Wall Street and perhaps give an update on the realities of the coming dilution starting this week with the expiration of the lock-ups from the IPO in May. We think this shows the company is realizing the coming dilution and trying to convince existing investors to stay put. That may be a good idea, but that does not mean they will buy more here.
In the same report, Faber also mentioned that Trim Tabs reported that institutional holdings of equities continues its downward spiral. Selling more stock in a broken IPO to institutions who are facing withdrawals by investors is equivalent to salmon swimming upstream.
The announcement that Facebook would enable gambling house Gamesys out of the UK to offer Bingo for real money to UK Facebook users was received by investors as no news at all. Perhaps this reflects investors' boredom with FB's new ways to drive revenues.
Investors seem to be concerned with the real issue of dilution and how that plays out in terms of valuation of FB. In our last article, we outlined this issue extensively. A new article this weekend "15 Signs Facebook Has Cancer" may offer a growing new concern on top of FB's troubling mobile ad revenue cannibalizing existing ad revenue disclosure in their recent 10Q as well as the massive onslaught of dilution. It actually highlights a concern that only Rupert Murdoch and News Corp (NWS) shareholders understand all too well from their MySpace fiasco: user drop off and drop outs - aka "the waning coolness factor". The new perception out in cyber-social-media is that too much "facetime" on FB is equivalent to being labeled a loser. The article highlights that time is precious so why give it to Facebook for free.
As Woody Allen's new movie To Rome With Love points out, humans are fickle about their personal lives. It's feast or famine; people want to be heard and be out there and once they are, they strive to get their privacy back.
We suggest staying out of the way and perhaps even being short FB this week to see how this plays out. The announcement that Microsoft (MSFT) is staying put gives us no comfort as they have sold 6.56 million of their 32.8 million Facebook shares for $249M and have already cashed out $9M more than they invested in Facebook. Now they can milk the Facebook platform for free. In fact, we think the road-show could be a negative as investors start to really understand that the dilution factor is real. We also point out that the Street really doesn't like the hype FB has been selling. Also, if there is anything new disclosed to any investor, FB has a duty to file an 8k promptly with the SEC highlighting the news given to those privileged investors.