4 Reasons to Avoid Facebook Shares
June 6, 2012
Facebook has already sunk 45% from its peak on its first day of trading. But does its current stock price of around $25 make it a deal?
Here’s several reasons to think again before diving into FB (NasdaqGS: FB) shares:
1) Facebook’s dual share class is a good recipe for market underperformance. Facebook’s CEO Mark Zuckerberg owns 18 percent of the company, but he controls 57 percent of its voting shares. A study evaluating hundreds of companies with dual-class from 1994 to 2001 by Wharton finance professor Andrew Metrick showed notable underperformance of dual share class companies versus those with a single share class.
2) More Facebook shares will soon flood the market. On August 20, the first lockup period of 172 million Facebook shares will expire. Thereafter, more FB shares will come to market after lockup periods of 151 and 181 days after its May 18 IPO date. Insiders and employees will be dumping their shares on anyone gullible enough to buy them. All told, around 1.34 billion shares will be eligible for sale.
3) Facebook is an unproven advertising medium. A poll by Reuters/Ipsos showed that four out of five Facebook users have never bought a product or service from comments or advertisements on the social networker’s Website.Put another way, Facebook still hasn’t figured out how to turn its 900 million users into an effective platform for its advertisers. Recently, General Motors (NYSE: GM) stopped advertising on Facebook. These aren’t the sort of trends you like to see as an investor.
4) Facebook shares still haven’t found a bottom. It’s a very bad sign whenever a stock begins to substantially underperform its peers. Facebook has lagged both the Nasdaq-100 (NasdaqGM: QQQ) and S&P technology stocks (NYSEArca: XLK) in its short trading history. How low will FB shares go? Definitely a lot lower than any of Wall Street’s analysts have predicted.
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