Beware of Facebook's Near-Term Volatility

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Facebook (NASDAQ: FB) is an interesting business. It is not just a simple social networking site anymore. It is a society for everybody to get updates from friends, family members, and other people. When surfing Facebook, one becomes an addict, it is hard to get away from it. By uploading pictures, stories, and thoughts on the site, users have let Facebook own those data, either public or private. In the beginning of October, Facebook reported to have 1 billion users, a seventh of the world’s population. The population of Facebook is just less than China and India, and three times bigger than the United States.

It definitely sounds like a sexy business. However, should investors own it? If we should, should we own it now or later? Of course, the cheaper we buy a stock, the better.

As we all might know, Facebook’s insiders have lock-up periods, which restrict them from selling the shares in the market. I think whenever a certain lock-up is expired, that would trigger sells no matter what. That certainly affects Facebook’s stock price, especially when there is a huge amount of shares that could be sold freely by insiders. Here is the schedule for certain lock-up to be expired since October this year:

<img src="/media/images/user_14219/screen-shot-2012-11-10-at-65313-pm_large.png" />

As we can see, on Wednesday, November 14, the lock-up period of the largest batch with nearly 750 million outstanding shares and 28 million shares underlying pre-2011 RSUs would be expired. Currently, Facebook has around 2.17 billion shares outstanding. So this lock-up expiration will release around 30% of the total shares. That would be a trigger for an increased volatility in the next several weeks for Facebook.

For the previous two weeks, Mai.ru Group has been a seller of Facebook shares as well. Mail.ru founder, billionaire Alisher Usmanov invested in Facebook when its valuation was in the range of $6 billion - $10 billion. He has made a good decision to sell Facebook shares before an expiration of the previous lock-up period. The sale value at that time was worth $370 million with 16 million shares reducing Mai.ru’s stake in Facebook from 1.34% in September to only 0.75% at the end of October. However, in its corporate website, it is reported that the ownership of Facebook was only 0.52%, so the stake in Facebook has reduced further for the past week. In the past, Mail.ru and its investors must be quite happy with Facebook trades. During Facebook’s IPO, it received $745 million from Facebook’s sale, and it would pay $795 million to investors in the form of special dividends.

As of September, Facebook had $14.1 billion in stockholders’ equity, $10.5 billion in cash and only $1.86 billion in total liabilities. Currently, Facebook is trading at $19.21 per share. The total market capitalization is $41.62 billion. It is valued at more than 200x P/E and 2.9x P/B. Professional networking site, LinkedIn (NYSE: LNKD) is worth one fourth of Facebook in terms of market capitalization, but with a crazier valuation. LinkedIn has experienced a continuous decline since September. It is currently trading at $95.62 per share, and valued at 625x P/E and 12.4x P/B. However, as I mentioned in my previous posts, LinkedIn had 175 million users, only one sixth of Facebook's. Thus, at the current price, each LinkedIn user is valued at $58.68 in the market, whereas each Facebook's user is valued at $41.21. A higher valuation of LinkedIn might be due to the stickiness of its business model. It is a professional networking site with people’s business contacts and resume, which often takes people more seriously. I personally think LinkedIn’s users would be more loyal than Facebook’s. Furthermore, because of its professionalism, LinkedIn became the top networking site with sticky users and the highest ability for customer base’s monetization 

My Foolish Take

Personally, I would like to get a piece of Facebook too. However, with the largest batch of recent lock-ups having expired, investors would suffer from volatility and price declines in a short period of time. In a near future, there would be more volatility and more price pressure for Facebook’s shares. I would rather wait for more declines to initiate a position in the best global social networking company.

 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus