As Facebook (FB) shares have rallied in connection with QE3 which we have described as Possible Scenario 2 in "Facebook: "Hotel California" 2012", we see this as a critical crossroad for all shareholders and traders in the name. The increase in freely trading shares by expiring lock-up agreements and vesting of options and restricted share units which we collectively call "Float Bloat" as extensively described in our previous articles is already underway.
We believe there is absolutely no compelling reason for new investors to buy shares today and fight the incoming "tsunami" of shares (1.186 billion) that will be available for sale in Facebook in the next three months. In fact, we think the Facebook share creation mantra is like the famous Doritos commercial "Don't worry, we'll make more." So we ask: "What's the rush?" Why buy now when we can most likely buy cheaper later. In fact, aggressive traders may be inclined to short the shares at these higher prices during this QE3 induced rally. The only investors who are compelled to buy today are those protecting their existing stakes in the company. This process is known as "averaging down" the cost of their position in Facebook. The most likely candidates for this are the funds who invested right before and after the IPO in May. A recent Wall Street Journal article highlighting these funds and their disproportionately high percentage in Facebook is very informative as to who may be currently buying shares to protect their existing holding's value.
One other point we believe should be highlighted is the unusual volumes that are being reported in trade volumes for Facebook shares. There is often a difference reported intra-day between the Nasdaq trade volume and that reported by other sites such as CNBC and Yahoo. We believe that High Frequency Trading is rampant in Facebook and therefore exaggerates many of the moves in the stock. There has been more scrutiny in this area recently by the SEC with a ruling and fine recently announced. This could be a dangerous variable in FB trading that potential investors should keep a close eye on.
In addition to this basic issue relating to the Facebook capitalization chart and related lock-up expiration and vesting schedule, there are a few other notable negatives which may hamper the current lofty fully-diluted valuation of Facebook. Here's a few highlights we see:
Class Action and Derivative Suits
When companies see their stock price fall as Facebook has, class action lawsuits are likely to follow like night follows day. A recent article in the Chicago Tribune updates the status of at least 33 lawsuits seeking class action status against Facebook as well as the status of at least 13 derivative suits involving Nasdaq. These suits are often a distraction, but in the case of Facebook there is only one control person who has put all responsibility on his shoulders- CEO Zuckerburg. He just may want to bring in some seasoned help to gain some "street" savvy to deal with these issues and others as well.
Kids apparently like the anonymity of Twitter, something that seems to be a foreshadow of their understanding that privacy matters. Appropriately, Twitter seems to building on its lead in the mobile arena by actually adding more Facebook-like "Cover Photos" to its platform and further biting into Facebook territory. Our belief is that Twitter was built for mobile and therefore will be the leader in this arena.
Another sign of corporate immaturity at Facebook we see is the "ego" driven move to build a Frank Gehry office extension at Facebook. One has to ask the question: "Where's the budget control?" With the real estate market still under pressure, we must ask FB if there was a better deal to be cut. Couldn't they be more opportunistic like their idol Google (GOOG) in their non "trophy" office deals.
Seasoned media banker Porter Bibb recently commented on CNBC that Chairman Zucekrburg was "in over his hoodie." We believe this just might be the case, especially with the recent rally adding over $10.8 billion in market-cap in anticipation of miracle growth.
Recently, we recalled the famous Yogi Berra-ism ""Nobody goes there anymore. It's too crowded." Could this be what's happening to Facebook? According to our ad-hoc polling, kids are migrating from Facebook because their parents are arriving. We think this Derek Baird article backs-up our findings and explains kids feeling their space has been violated.
We believe Facebook is fully valued to accommodate many of the positive developments which are anticipated for the platform in the intermediate term. We also believe that the only "sure thing" at Facebook is the "Float Bloat" which is around the corner. We ask why anyone wants to be a hero and buy the stock now?
Disclosure: I am short FB.