Allowing a brief moment of reality to take over, Facebook actually lost about 8 cents per share for the quarter. It's up to you to decide if you want to ignore one time charges or not. If you do accept that one time charges are just that, one time, don't be surprised if more "one time" charges appear in the future. You have no say in Facebook. As a shareholder you have rights, but how wonderful is that when the CEO owns a controlling interest? I have a 10-year-old and an 8-year-old. Sometimes one will come to me and declare, "It isn't fair that he _________ (fill in the hourly gripe)." If the equity in the situation isn't important to me, I will often respond, "Life isn't always fair" so I can avoid a hassle. If shareholders start to believe they are not receiving fair treatment, rightly or wrongly, investors can expect to hear "life isn't always fair" because no one will care. The board answers to the CEO, not the other way around at Facebook. Zynga's ( ZNGA) shares not only nosedived but it sent Facebook's lower, too. Facebook depends on Zynga for a large proportion of Facebook's revenue and earnings. ( TheStreet's Jim Cramer writes about the latest rally in
Not Trusting This Rally. You need a Real Money Pro account to read, but Cramer's analysis makes it worthwhile.) The connection with Zynga is the next red flag for Facebook. Zynga is clearly in trouble. More than one out of five shares are shorted. Short-sellers are typically the smartest guys in the room. It's not small mom-and-pop retail traders driving short interest up to 34 million shares. It's not just the shorts who are questioning Zynga. Zynga doesn't have any debt, but at $3 per share the market is not valuing Zynga for much more than cash. The market isn't pricing in substantial earnings. Add in an inflated price due to the wide interest in the company and you may have troubling locating many large long positions. Institutional and mutual funds account for about 60% of the Facebook shares. That's a relatively small amount when you consider all the insiders who will soon sell their shares at the end of the lockup period.
The next red flag is the end of that lockup period. Insiders can begin selling shares soon. Once the lockup period is over and insiders can liquidate shares, two things will happen. The first noticeable event is the dilution of the float. More shares available means greater supply, which in turn results in a lower price. The second and less noticeable impact is loss of talent and lower productivity. Let's face it, when a group of people become rich, some will lose their motivation to come in and grind it out every day. Each environment is different, making the impact an unknown variable. For most organizations, the impact is small because they plan on it. It's the outside forces that are a greater concern. It's a mistake to discount Google ( GOOG) and Google's entry into the social space. Google is the undisputed czar in online advertising. It knows how to sell ads online. If there is a way to profit from social media, you can count on Google grabbing market share. If you have any questions about Google's ability to take on a market leader, just ask Yahoo ( YHOO) and Research In Motion ( RIMM) how their market leadership fared after Google stepped into the ring. Yahoo was sent to the back of the class but RIM was taken to the woodshed. Google does a very good job, but it didn't rise to the top because it is great. Google rose to the top because others failed. For example, Yahoo still to this day doesn't have a simple method to display and buy Yahoo ads. Why not? With RIM, I could go on all day. For business people, holding a BlackBerry was a status symbol, a demonstration that whatever you do it's important enough that you need one. A BlackBerry still sends a message about your status, only it's not a status you want to articulate. RIM's and Yahoo's fate wasn't sealed overnight. RIM was provided ample notice that power-users wanted a larger screen, a camera and other features. Yahoo failed in providing a friendly ad interface in the way Google provides users.
Both RIM and Yahoo were managed by extremely intelligent, knowledgeable people who became billionaires building companies from scratch. They appeared to have everything going for them until Google walked into the room. Not unlike a newly minted 28-year-old billionaire with absolute control of Facebook. (For more of my ideas, see
10 Profitable and Oversold Stocks Ready To Move Higher.) At the time of publication the author had no position in the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.