Shares of social media giant Facebook Inc. (FB) hit the market in May through one of the most highly anticipated pump and dump IPOs of all time. Since it’s debut, the “can’t miss” stock has so far failed to live up to the hype with FB stock falling from $38 per share to under $20, $19.82, in recent sessions. Since its now at $21.70, down 0.11 today, is it time to buy shares?
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FB Stock Chart
Facebook shares are trading at more than $16 below its IPO price and many investors are wondering if now is the time to buy. A number of Wall Street analysts appear to think the time is right and the legalized pumpers have been getting more bullish on FB as the share price declines.
In July, only seven analysts rated FB a buy or strong buy. This month, the number of Facebook bulls has jumped to 17: 11 rate FB a buy while 6 say it’s a strong buy. So does this mean it’s time to back up the family station wagon and load it with FB stock? Not so fast…
The company’s Q2 earnings report, it’s first as a public company, shows growth continues to slow at the social media giant. Revenue for Q2 rose 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 Q1. Even more of a sign to avoid buying was that Q2 was the slowest quarterly revenue growth since Q1, 2011 when FB first began reporting such data.
Declining revenue growth wasn’t the only sign of decline in Q2. The company also reported a net loss of $157 million, 8 cents per share. Take out the stock-based compensation and the loss puts on a glass slipper and turns the pumpkin into a profit of $295 million, 11 cents per share, which was in-line with analysts’ estimates. However, that loss compares with a net profit of $240 million, 11 cents per share, for the same period in 2011.
Scratching your head yet? Well how about what you didn’t see? The missing information from the report has many investors concerned about the near-term for Facebook. In a surprise move, Facebook chose not to provide any outlook for Q3. Obviously this is a bad sign when management stops providing financial guidance. Usually, it indicates 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, it says out loud – FB stock is going to get even cheaper, just wait a while longer.
How much cheaper? 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. When the lockup period ends, these investors are free to sell their shares without any further restriction.
Between now and March, 2013, 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. 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.
About FB Stock
Facebook, Inc. operates as a social networking company worldwide. The company builds tools that enable users to connect, share, discover, and communicate with each other; enables developers to build social applications on Facebook or to integrate their Websites with Facebook; and offers products that enable advertisers and marketers to engage with its users. As of February 2, 2012, it had 845 million monthly users and 443 million daily users.
Bottom Line: FB is the most expensive of all penny stocks trading in the market right now. Mark my words: Facebook shares will be under $10 before next summer.
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