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Are Shorts Getting A Free Lunch?

I am amazed that Facebook bears have been successfully able to add selling pressure to the stock as more shares will become available for trade during lock-up expiration. How did investors start getting free lunches? Either I missed Econ class that day or something is not adding up here. Last time I checked information is already baked into stock prices (at least for all practical purposes). Efficient Market Hypothesis describes this phenomenon, but for the layman, it is easy to see why any exploitable gaps in markets quickly evaporate. So how can analysts and investors continue with their mantra about FB shares staying under pressure for another 6 months as the lock-up expires. It can't be that easy! In fact, I would advise doing the opposite. FB is becoming coiled spring ready for a big bounce.

Another dark cloud that's been looming over FB lately is their perceived ability to monetize their user base. So much attention has been paid to this idea since the IPO, but I still believe the bulk of the company's revenue will continue to come from selling ad space, helping advertisers to reach specific groups more effectively based on FB's vast database of public profile data, and hosting apps on its own platform as well. So I believe revenue growth will be a function of membership growth, not the monetization of FB's user base. And no one can dispute their success in this area; the site is currently nearing 500 million members and is the most visited site on the internet. I repeat, Facebook.com is the most visited site on the internet! This is more than Google, Utube.com, Amazon.com, MSN.com, etc. However, the market currently thinks Google is 5.3 times more valuable than Facebook. And that does not shock me for the time being, but FB's true value will be realized as investors begin to use a more realistic growth rate in their discounted cash-flow models. So don't let its relatively high P/E ratio spook you because that figure is based on earnings twelve months ago.

As far as general investor attitude, older generations seem to dislike the idea of Facebook and want to believe that the company will fail. Let me be very clear: I strongly believe that the advent of Facebook has marked a turning point in human history. And it wasn't because the concept was particularly brilliant or innovative. It was simply because civilized society had reached a point in the modern digital era where the new generation required this service in order to keep up with their quickly evolving environment. People now depend on social media to stay informed, mobile, and competitive. Not only has Facebook had an effect in the Western World, but it has also enlightened and empowered more primitive societies, which can be evidenced by the Arab Spring revolution.

So don't buy into the FB bashing. The company has a lot of growth to realize, and plenty of cash in the bank. I'm sure the stock's recent decline will attract large institutional buying soon. Remember when Google IPOed in 2004 for less than $100? Of course that was during a different economic climate, but look at it now. Don't be the guy who missed out on a great buying opportunity because of analyst negativity.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FB over 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.