Is it Time to Bail?
Karen 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 a prime example of what happens when investors fail to remember the past. The company, unlike the dot.coms, did make money but their 1st quarter earnings report fell far short of what investors had hoped for and expected. The one big thing Facebook does have going for it is their membership roster of almost one billion members. But social networking aside, Facebook investors better steel themselves for another round of falling stock prices starting this month.
A recap of Facebook’s predictable decline is painful. Facebook started with a market cap of $104 billion in May and some two months later stands at $66 billion. The stock price fell from an IPO opening day of $38.00 to the current $21.10. Those ten thousand shares bought for $380,000 are now worth $211,000. To make things even worse, Facebook members are losing interest, logging in fewer times and spending less time on the site. North American year over year growth has tumbled from 97% to 25%.
And Facebook’s not the only company to see its market cap dramatically fall after their IPO. Groupon’s IPO (NASDAQ: GRPN) started with a $12.7 billion market cap that fell 55% to its’ present $6 billion value. Gaming darling Zynga (NASDAQ: ZNGA) has seen their market cap (and subscribers) evaporate from the IPO high of $7 billion to $2.07 billion. And Pandora Media’s (NYSE: P), former IPO value of $2.8 billion now stands at $1.59 billion.
If this were the end of Facebook’s woes, the outlook would be fairly optimistic. Despite all the bad news, Facebook is actively looking to maximize its membership base without driving them away. The company could probably get away with charging each a member a nominal monthly fee, such as $1.00, or offering premium services and features for a small fee. Since half of Facebook’s members, or about 543 million, use their cell phone to log into their account, the company could charge a $1.00 per month access fee and incur little backlash.
Facebook is also trying to revamp its advertising to generate more revenue, but recent accusations regarding fraud may serve to derail their efforts. Grumbling about bots clicking on ads to drive up advertiser’s costs have dogged the company for years, but Facebook advertiser Limited Run recently went public to announce they were pulling their ads after determining that 80% of their clicks came from bots. Another big problem for Facebook is the suspiciously high number of likes generated by fake accounts located in Egypt, India, the Philippines and other nearby countries that likewise drive up advertiser costs and Facebook revenue.
But what may ultimately be the shareholder’s undoing is the torrent of shares set to hit the market when the lock up period expires. On August 15th, 268 million shares are unlocked, quickly followed by 247 million shares on October 14th, 1.33 billion on November 13th, and another 124 million on December 13th. In short, almost 2 billion Facebook shares can be sold on the open market before the year’s end which could herald another steep drop in stock price.
So is it time for Facebook stockholders to jump ship and sell? Or hold on in hopes that the company will be able to turn it around in the future? Investors choosing to hold and wait it out could consider put option strategies to benefit from the falling stock price, especially with the first lock up period expiring in about two weeks. For a less risky strategy, investors could write covered calls and collect the premium to help offset the stock’s loss in value. Finally, and probably the most unpleasant, would be to sell the shares before the unlock date and use the resulting loss to offset any other capital gains.
It’s a bitter pill to swallow no matter which option Facebook stockholders select. But the hype surrounding Facebook’s IPO was a replay of that of the failed dot.coms, and should have been a dire warning to potential Facebook investors: caveat emptor - let the buyer beware.
kprogers has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook. Motley Fool newsletter services recommend Facebook. 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.