John Shinal's Tech Investor
What the Facebook skeptics know8/17/12 2:25 PM ET (MarketWatch)
SAN FRANCISCO (MarketWatch) -- When
Thanks to the intense media scrutiny Facebook has received, retail investors now know more about the company than perhaps those on Wall Street would like. They know that more than 1.3 billion Facebook shares will become available for sale by insiders between now and year's end.
They now understand that trading post-IPO shares of social media companies is a rigged game, in which a scarcity of shares supports an artificially inflated stock price. Once that scarcity ends, the stocks are subject to the harsh forces of supply and demand in a more open market.
Take a look at the charts for all the newly public Internet companies. Other than LinkedIn, they are ugly charts.
Never buy when insiders are selling; that's a battle-tested war cry of professional traders. It's something I warned investors about on the eve of the IPO.
And given the extreme dotcom-like bubble valuation of Facebook's IPO shares, no one should doubt that nearly all insider activity to come this year will be more selling.
Executives, early investors and employees will sell because they can still make profits by doing so. Unlike retail investors, who paid $38 for their stake, these lucky folks got their pre-IPO shares for just a few dollars each. Or, in the case of the very lucky, for just a few pennies.
The savvy will also sell because they can see even better than retail investors that Facebook's secret is out.
The secret is this: Every quarter, a greater percentage of Facebook's most active users are accessing its site via mobile devices, rather than desktop PCs. And the ad revenues in mobile advertising are so far just a fraction of those for traditional Web-based ads.
This is something that was either ignored or not seen by all those venture capital and angel investors who fought like dogs to get an early piece of Facebook.
Ultimately, it won't matter to them because, as mentioned, they can still make huge profits on their investment, just as they did in the May IPO.
But it should matter a great deal to anyone considering investing in Facebook right now, because it means the company's profit outlook for the next few years won't be what was expected just a few months ago.
For these reasons, insiders will be selling Facebook shares for the next four months. Why should you be buying?