Sell in May, Buy Facebook in the Fall

By Moustafa El Zanaty - September 4, 2012 | Tickers: AMZN, FB, GOOG, NFLX | 0 Comments

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Facebook (NASDAQ: FB) has hit a new all time low and it reminds me of the old  investing adage of sell in May.  It seems for Facebook, whose IPO was at the end of May, their share price has been going in one direction, and not the direction early investors of the IPO would like to see.  For the most part, the idea of stocks falling over the summer ready to be scooped up in the fall at a cheaper price ha been proven generally untrue.  Facebook on the other hand may hold some potential as an undervalued stock coming into the fall.  

Facebook’s Story

Looking at the Facebook story, very little has gone right for investors since its IPO, mostly because of the sky high early expectations.  Like a marriage in which both parties think that everything will change after the wedding, early investors believed that after the IPO Facebook would be sunshine and rainbows.  As anyone who has followed the stock since its IPO knows, it has been a bumpy ride downhill.  Early investors sold off as the stock initially tanked, and then those who had vested shares sold them this month as the first lock up ended.  What is more surprising, though, is that very little has changed in the Facebook business model and in their market.  Those who had early shares in Facebook will continue to turn some of that equity into cash and Facebook, it seems, will keep moving forward, trying to provide the best possible social media experience for its users while monetizing its site use. 

Moving Forward

There is a strong possibility that when the sell-offs and exuberance are over and the experts have decided that Facebook will be an abject failure there could be a strong buying opportunity.  Facebook is constantly updating its user interface (sometimes to the chagrin of its users) but it is always striving to improve.  For example, it has recently begun cracking down on fraudulent "likes," which will only help its online ad business.  Google (NASDAQ: GOOG)  is the clear dominant player in online ads but Facebook does pose a legitimate alternative to Google when advertisers are looking to target more specific audiences.  Before the advent of the internet, advertisers utilized multiple types of media to attract customers.  They would advertise on T.V., radio, newspaper and billboards; why would the internet be any different?  There can be multiple avenues online to target your customers. Google and Facebook are two completely different ad platforms and can both succeed at the same time.  

A Not So Hidden Gem

The opportunity with Facebook is what it could be down the road. In a couple years we could all look at the uncertainty there has been and wonder how we got this so wrong.  Facebook has become a disliked company since its post-IPO tanking but has remained one of the premier companies to work for in silicon valley.  Unlike Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN), which have begun to compete head to head with the release of Amazon Prime, Facebook faces little direct competition.  The idea that a company can innovate its way into grabbing Facebook’s market share is easy to repeat, but hard to actually make a reality.  We can look at what happened to Diaspora, which has recently given up its pursuit of Facebook status.  Netflix is the market leader in streaming movies but with Amazon looming, the battle could get ugly and expensive for both parties.  With Facebook not facing that kind of situation immediately, it has time to continue to innovate and improve.  When the leaves are changing color in New England, a purchase of Facebook could be a welcome addition to your portfolio.  

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