If you’re one of the millions of investors who are hanging on to their Facebook shares, it might be time to ask your broker to please stop the ride and let you off. The struggling social network has been in a tailspin ever since it went public, and this week it suffered yet another crushing blow after some of its biggest and most faithful insiders decided to dump their shares and go off in search of something better. The future now looks immutably grim for Facebook.
Facebook is currently trading at around $19.24 a share. That’s nearly half of its IPO value of $38 a share, and now that the initial shares are being unlocked for resale, look for that number to drop even further. Just this week, for instance, Peter Thiel – one of Facebook’s earliest investors – sold off 14 million shares, or equivalent to 80% of his holdings in the company. The Founder’s Fund, another major investor, dropped 2.6 million of its 6.8 million shares as well. That puts the number of outstanding shares at roughly 2.1 billion, making the company worth $40.2 billion – far less than its $75 billion IPO valuation. Is this math correct? I’m not sure how to check it – I don’t know which ‘outstanding shares’ this refers to. That could just be me though. If not, make a change.
To put Facebook’s position in perspective, take a look at Instagram. In April, Facebook agreed to buy out the popular photo-sharing platform for $1 billion. Rather than take that all in cash, Instagram’s executives foolishly accepted a split of $300 million in cash and 23 million shares of Facebook’s stocks, which at the time were considered as good as gold. Now that the stocks have dropped in value, Instagram is out $300 million.
Consequently, stockholders should be anxious when 1.2 billion shares of Facebook are released from lockup on November 15. When privileged investors were allowed to dump their holdings last week, share values fell by 5%. What will happen when nearly half of the company’s stock is free to sell? Here’s a hint – a recent poll by the Silicon Valley Business Journal found that 65% of readers would dump their stocks as soon as they could. This would precipitate a massive dilution of market value, and any investors left holding on to their stocks would be effectively screwed.
While the private investors who bought in early and then deliberately overhyped Facebook’s value have been able to get away with a tidy profit, there’s pretty much no chance that the average public investor will ever get his or her money back. So, if you’ve got shares in Facebook lying around, we suggest you dump them as soon as you can. It’s better to cut your losses than it is to go down with the ship – and the ship, in this case, is sinking fast.