Mark Zuckerberg Cashes In a Billion Dollars, Sparking Facebook Shares to Slide.
by Natalie Pace.
Includes a Social Media Stock Report Card.
June 5, 2012
This article first appeared in my Hot News on Cool Stocks List on May 11, 2012, a week before the Facebook IPO. Subscribers who heeded my alert to put the IPO on a Watch List, instead of buying in, avoided losses of 42% (almost half of their dough). Facebook shares rose as high as $45/share on its opening day (May 18, 2012), but were trading at $25.90 by June 5, 2012. Facebook has lost $41 billion in market capitalization, to settle in at a company valuation of $55 billion.
So, should you buy in now at the lower price? What about other social media companies that have been hammered, including Zynga, LinkedIn and Groupon? Click to see a Social Media Stock Report Card. Read the article in its entirety to find out what my updated reporting reveals.
You will find the updates I've made to the original article highlighted in purple. Some of the purple updates are eye-popping. If you thought that The Social Network (the 2010 film) depicted a young man who screwed his co-founder, wait until you see what Mark Zuckerberg did to those who bought into his IPO.
Facebook kicked off its investor road show on Monday, May 7, 2012 in New York City at the Sheraton Hotel, with characteristic Mark Zuckerberg renegade style. All of the guests wore suits; Facebook's chairman and CEO showed up in a black hoodie and sneakers. After all, the social media company that shook up the status quo and changed the way the world connects (and sparks flash mobs and fuels revolutions) isn't about business as usual. This is something Zuckerberg makes very clear in his letter to prospective shareholders, stating, "These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits. Simply put: we don’t build services to make money; we make money to build better services."
Does this sound a little 99% for a billionaire Wall Street executive who controls the future of the 4th most trafficked website in the U.S.? In his letter, Zuckerberg continues, writing, "By giving people the power to share, we are starting to see people make their voices heard on a different scale from what has historically been possible. These voices will increase in number and volume. They cannot be ignored."
One wonders how the empowered 99% will take to the fact that Zuckerberg quietly cashed in almost a billion dollars just four days after launching the Facebook IPO? Zuckerberg sold 30,200,000 shares at $37.58/share on May 22, 2012. The final price was slightly under a billion because, as you can imagine, flooding the market with that many sales at once tends to reduce the price. According to the daily price summaries listed on Google Finance, Facebook's share price ended May 21st at $34 and fell to $31 on May 22, 2012.
Facebook's team have made themselves the friend of 901 million active users worldwide, according to their S-1 filing -- a feat for the history books. But can the company transform Zuckerberg's vision and his vast reach into dollars and cents -- which is the only way to make friends on Wall Street?
Fast Facts to Consider Before You Friend the Facebook IPO
2. Zuckerberg is in complete control. Mark Z has all of the power of the company in his hands, with voting rights equal to 56.5%. Together, all executives and directors own 70% of the voting rights (pre-IPO). Zuckerberg is chairman of the board and CEO, and he doesn't have to answer to any independent directors because Facebook is a "controlled company." Zuckerberg owns so much of Facebook that he "will be able to effectively control all matters submitted to [Facebook] stockholders for a vote, as well as the overall management and direction of [the] company," according to the amended S-1 filing of April 23, 2012.
Now that Mr. Zuckerberg has cashed in almost a billion dollars, at a time when Facebook was losing $40 billion in valuation, he, and the company, are facing multiple lawsuits from IPO investors who feel that they were misled. This could breed further loss of confidence in Facebook shares. Other insiders who cashed out in the first days of trading include Russian billionaire Yuri Milner (DST) for over a billion, Accel Partners for over two billion, Peter Thiel for over half a billion and more -- all racing to cash in on May 22, 2012 (source: Money.MSN.com).
3. Sales and income are down. Sales were down by half in 1Q 2012, compared to 4Q 2011. Sales were $1.058 billion in the 1st quarter of 2012, which is 45% higher than $731 million in sales a year ago, but less than half of 4th quarter 2011's $2.653 billion in revenue (source Money.MSN.com). Net income in the 1st quarter 2012 was also lower than a year ago, at $205 million this year, compared to $233 in the 1st quarter of 2011.
Why were sales lower this quarter? Facebook believes this is partially due to an increase in mobile usage. At this time, Facebook has fewer ads on the mobile device, and thus, lower ad sales than when users connect online. As more and more people connect to the website on their smart phones, Facebook will have to invent a new, and friendly, way to profit. "How to make money on mobile is one of the big challenges that [Mark Zuckerberg] is facing. Another is the new transparency of being a public company," according to MySpace founder and former CEO, Chris DeWolfe (speaking on CNBC on May 30, 2012).
4. Facebook traffic is lower. Increased mobile usage might also explain why Facebook's online traffic is lower. (That and the fact that more people are back to work!) In December 2011, 162.5 million unique visitors spent an average of 7.05 hours online, in the U.S. In April of 2012, 158.7 million unique U.S. visitors stayed online for about six hours and 20 minutes (source: comScore)..
5. Beware of Insiders Taking Profits. As Mark Zuckerberg explains in his letter to prospective shareholders, "We’re going public for our employees and our investors. We made a commitment to them when we gave them equity that we’d work hard to make it worth a lot and make it liquid, and this IPO is fulfilling our commitment." Some insiders can sell as soon as the company hits the big boards on or around May 18, 2012, while others have a 6-18 month lockout period. Who knew that insiders, including Mark Zuckerberg, were planning on selling over $6.7 billion in shares only four days after the IPO, sparking a calamitous price reduction for the IPO investors?
You Friend Facebook's?
Add to that the timing of this launch -- just a few weeks before the June Gloom and seasonal summer backsliding on Wall Street -- and I'd say a "wait and see" approach could pay off more than jumping into a potentially overloaded boat, on very rocky seas. Having said that, I wouldn't be surprised to see a rapid rise on Day One of trading, and a rally in the NASDAQ (where Facebook will be listing). Beware of quick profit taking in the days that follow, however.
While Facebook could be at the beginning of a great run over the next decade, the market place itself might bring the price into a better buying range in the fall, and the next few months are going to be critically important for the young chairman and CEO who wants to retain complete control. Will investors trust Mr. Zuckerberg once they learn how much he cashed out in the first days of a backsliding IPO? Will the onslaught of investor lawsuits distract his focus to the point that the transition from online to mobile will not be monetized fast enough for the appetite of the fickle investor, who has already had her faith challenged in what is clearly the worst IPO of the decade?
Facebook remains on my Watch List for now. However, stay tuned because I'll continue to examine the vast potential of the world's largest social networking site, alongside the business reality that is or is not being monetized and achieved by a young, inexperienced chairman and CEO, who might have just met a formidable frenemy -- the shareholder.
As you can see from my Stock Report Card, I have more interest at this time in the more fairly valued Chinese Match.com -- Jiayuan (symbol: DATE). For reasons why I'd rather date DATE than FB this summer, be sure to read the comments on Jiayuan in my Hot News on Cool Stocks June 6, 2012 update. Jiayuan has made some key moves in the executive suite and board that augur well for the company.
About Natalie Pace:
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