Time To Buy Facebook Stock?

| August 13, 2012

Facebook (FB) shares hit the market in May through one of the most highly anticipated IPO’s of all time.  But the “can’t miss” stock has so far failed to live up to the hype.

Since its debut at $38 per share, FB has shed more than 42% of its value.

Facebook Chart

And with shares now trading just under $22 apiece, many investors are wondering if now is the time to buy.

A number of Wall Street analysts appear to think the time is right.  This group has been getting more bullish on FB as the share price declined.

Last month there were just seven analysts who rated FB a buy or strong buy.  This month… the number of Facebook bulls has jumped to 17 (11 rate the stock a buy and 6 say it’s a strong buy).

So does this mean it’s time to back up the truck and load it with FB stock?

Not so fast…

The company’s second quarter earnings report (and it’s first as a public company) shows growth continues to slow at the social media giant.  Revenue for the quarter ending in June jumped 32% year-over-year to $1.18 billion.

That may sound like solid growth, but it was slower than the 44% revenue increase Facebook reported in the first quarter.  And it was the slowest quarterly revenue growth since the first quarter of 2011 when FB first began reporting such data.

And declining revenue growth wasn’t the only setback in the quarter.

The company also reported a net loss of $157 million or 8 cents per share.  (However, if you exclude stock-based compensation, the loss magically transforms into a profit of $295 million or 11 cents per share, which was in-line with analysts’ estimates.)  That loss compares with a net profit of $240 million or 11 cents per share in the year ago quarter.

But the most disturbing part of the report had nothing to do with the company’s posted quarterly numbers.

It’s the information missing from the report that has many investors concerned about the near-term for Facebook.  I’m talking about guidance for the current quarter.  In a surprise move, Facebook chose not to provide any outlook for the third quarter.

Of course, it’s a bad sign when management stops providing financial guidance. 

It usually means one of two things.  The future is too uncertain to issue a reliable outlook, or conditions are deteriorating so fast that any outlook would be overly negative.  Either way, the lack of guidance is cause for serious concern.

And that’s not all…

Facebook shares are also about to face downward pressure from another powerful source. 

On August 16, the post-IPO ban on insider sales of FB stock begins to expire.  The so-called “IPO lockup” prohibits insiders and majority shareholders from selling their shares for a period of time (usually 90 to 180 days) after an IPO.  The rule is designed to prevent an oversupply of shares hitting the market too quickly.

But when the lockup period ends, these investors are free to sell their shares without any further restriction.

And in Facebook’s case, we’re talking about a huge amount of shares.

Over the next nine months, a whopping 1.91 billion Facebook shares will become eligible for sale on the open market.  That’s more than double the current share float, and it’s nearly equal to the total number of shares outstanding.

Clearly, this event is going to have a major impact on Facebook shares.

Remember, most of these insiders were early investors in Facebook.  They acquired their shares years ago at prices far below the hyped-up IPO price.  So even though FB shares have tanked since the IPO, most of these insiders should be able to sell shares at a hefty profit.

And as more and more shares hit the market, FB is likely to continue heading lower and lower.

Bottom line…

With FB trading in the low $20 per share area, it’s tempting to believe the shares are a bargain here.

But don’t fall into the trap.

The shares are still awfully expensive given slowing growth and a lofty forward P/E of 34x.  And as the lockup period expires, we’re sure to see a flood of new shares hitting the market which will likely keep a lid on FB’s share price.

Profitably Yours,

Robert Morris

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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