Facebook’s Pseudo Stock Buyback

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

When is a stock buyback not a stock buyback?  When it’s a Facebook (NASDAQ: FB) buyback, of course!

Facebook’s announcement on Wednesday of a “massive” $2 billion dollar stock buyback is pure Zuckerspeak.  Facebook did no such thing.  Holding back on employee stock distributions and Mr. Z promising not to sell his stock for a year is not a buyback.

Facebook had already earmarked 234 million stock shares for employee compensation, of which the 101 million shares were a part.  It’s not as though the shares were taken directly from the outstanding float.  The announcement also stated the stock would no longer be considered “shares outstanding”, but failed to confirm the shares would be retired.  As such, Facebook can return these shares to the employee compensation pool anytime they want.  And the 101 million shares themselves represent less than 4% of the fully diluted shares.  Not exactly a bell ringer.

Facebook is paying the taxes associated with stock grants with its cash, something companies do all the time.  So why does Mr. Z consider this noteworthy?

It’s odd that as a self-proclaimed growth stock, this four month old company announced they were doing a buyback.  One main reason companies do buybacks is to make more stock available to meet demand, but given the number of shares held short, running out of stock to sell doesn’t seem to be a Facebook issue.

The stock price did get a nice 4% boost from the announcement, however.  It closed yesterday at $18.58, and analysts were quick to trumpet this as a strong signal to buy before the price skyrockets up.

Ridiculous.  Nothing about Facebook’s business model has changed.  It’s still floundering about, losing key employees and running down every blind alley trying to figure out how to make a buck.  But if Facebook decided to get serious about generating revenue through mobile advertising, what example could they follow?

"We generate our revenues almost entirely from advertising... Advertising revenues made up 97% of our revenues in 2009 and 96% of our revenues in 2010 and 2011." Judging from the above quote and information contained in the Form 10-K for fiscal year ended December 31, 2011, and filed on January 2012, Google (NASDAQ: GOOG) would be a very good place to start.

Facebook could also take a few lessons from Yahoo (NASDAQ: YHOO).  Despite losing key personal and hiring new CEO Marissa Mayer to help Yahoo reclaim lost market share, the company still manages to pull in over a billion dollars of advertising revenue quarterly.

 Advertising Revenue

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>2010</p> </td> <td> <p>2011</p> </td> <td> <p>1Q 2012</p> </td> <td> <p>2Q 2012</p> </td> </tr> <tr> <td> <p>Google</p> </td> <td> <p>$28.236 B</p> </td> <td> <p>$36.531 B</p> </td> <td> <p>$10.225 B</p> </td> <td> <p>$10.525 B</p> </td> </tr> <tr> <td> <p>Yahoo</p> </td> <td> <p>$  6.324 B</p> </td> <td> <p>$  4.984 B</p> </td> <td> <p>$  1.222 B</p> </td> <td> <p>$  1.217 B</p> </td> </tr> <tr> <td> <p>Facebook</p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p>$    872 M</p> </td> <td> <p>$    992 M</p> </td> </tr> </tbody> </table>

Facebook’s been selling ads on its site since 2007, and the above chart shows the company hasn’t been able to get it right.  And without steady revenue, investors can count on Facebook’s stock price continue to slide into the single digits. 

It won’t take long for the excitement over this “buyback” fades and the stock resumes its downward march.  Savvy investors will see this announcement for what it is: a chance to short the stock or buy a put option on a quick bounce up before the next lock up period expires in October.  ‘Cause when Zuckerspeak says he’s not selling, what it really means is that he’s not buying.


kprogers has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services recommend Facebook, Google, and Yahoo!. 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.

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