You Should Ignore This Facebook Advice

Facebook's (Nasdaq: FB  ) stock may have melted since its disastrous IPO, but at least one insider thinks it's time to rise.

Last week, Facebook director Reed Hastings funneled some of the wealth he's created as CEO of Netflix (Nasdaq: NFLX  ) into buying Facebook shares. According to SEC filings, Hastings acquired nearly 48,000 shares last week at a weighted average price of $21, which adds up to a cool $1 million.

The form also states that Hastings' total Facebook ownership now is equal to the new addition, which makes me wonder why his 20,000 shares of restricted Facebook stock don't show up here. At least 25% of those shares, which were granted when Hastings joined the board, vested in July. Counting the entire batch of restricted shares as current holdings, Hastings now has about $1.5 million of skin in the Facebook game.

This is clearly not the core of Hastings' portfolio. His shares in Netflix are currently worth $62 million, and he also owns $5.4 million of Microsoft (Nasdaq: MSFT  ) , where he also serves on the board of directors. The Facebook buy mirrors his early activity at Microsoft, but on a smaller scale: Within the first 15 months of that board appointment, Hastings bought $5 million of Mr. Softy's stock. He has neither added to nor sold from that position since then.

Does this buy mean anything at all?
It's always nice to see insiders like executives and directors betting their own money on a company's success. If people with a direct view into Facebook's operations think it's worth an investment, you'd think the stock would be poised to pop. This is supposed to be a very shareholder-friendly use of company cash.

On the other hand, many companies simply waste money on buybacks. Hastings is a brilliant business leader but not such a genius when it comes to investing. One of his worst moves at Netflix was to authorize share buybacks at high valuations and then flood the market with low-cost shares when he needed that cash back.

And his bet on Microsoft hasn't exactly paid off in spades, either. Dow component Microsoft's share price has run neck-and-neck with the Dow Jones Industrial Average (INDEX: ^DJI  ) since Hastings bought his shares -- except that a Dow fund would have beaten Redmond's finest by about 3% of superior dividends.

In other words, Hastings' market moves are not exactly the gold standard of investment advice. I still believe that Facebook is too expensive at today's $22 per share, and that the underlying business may have peaked already. My dim view of Facebook's future is unmoved by Reed Hastings' seal of approval or sea lion of enthusiasm.

What's a Fool to do?
The only way to turn my frown upside down is to restart Facebook's stalled growth engines and improve the anemic monetization of its torrential online traffic. One or the other isn't enough, and doing both will be very difficult -- especially with a green management team under Zuckerberg's dictatorial thumb. I recently canceled my thumbs-down CAPScall on this stock just to lock in some drastic short-term points, but the bearish rating is back again. There just isn't any substance behind Facebook's flashy face.

This being the Motley Fool, I'm certainly not spouting a party line here. To read another view of Facebook, you should pick up our brand-new premium report on the stock. Our best analysts will hone their analysis and keep you updated for free over the next 12 months. Just click here to get started.

Fool contributor Anders Bylund owns shares in Netflix and has also created a bull call spread atop those shares, but he holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Netflix, Microsoft, and Facebook. Motley Fool newsletter services have recommended buying shares of Facebook and Netflix. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy.
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Read/Post Comments (10) | Recommend This Article (42)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 13, 2012, at 3:47 PM, import2udirect wrote:

    Netflix at its levels I always felt some kind of combination between the two

    just do it already.....

    keep fb the way it is,.... free same deal...

    add premium features maybe include a movie or two per month for free...

    and make the frkin fb premium account even at 1usd a month your talking huge positive cash flow

  • Report this Comment On August 13, 2012, at 11:10 PM, mountain8 wrote:

    Dear import2,

    This article is about facebook. Perhaps if you wrote in words I might see your point.

    And the article: "The form also states that Hastings' total Facebook ownership now is equal to the new addition,"... that's 96,000 shares out of several billion. makes him about a .000000000001% owner.????

    "Hastings is a brilliant business leader..." "One of his worst moves at Netflix was to authorize share buybacks at high valuations and then flood the market with low-cost shares when he needed that cash back." "In other words, Hastings' market moves are not exactly the gold standard of investment advice"

    I don't understand why you think these kind of moves are genius business. From this article and the IPO debacle, I just see him as scum. A greed driven piece of scum.

  • Report this Comment On August 14, 2012, at 12:02 AM, mhy729 wrote:

    Uhh..."...but not such a genius when it comes to investing." Did you read that entire sentence?

  • Report this Comment On August 14, 2012, at 9:10 AM, TMFZahrim wrote:

    Thanks for the assist, @mhy729.

    @mountain8, I'm making a clear distinction between Hastings as the leader of a fantastically successful video empire, and Hastings as a hit-and-miss investor with more misses than hits. Is his track record in business perfect? Nope, mostly thanks to the Qwikster fumble, but I dare you to find a leader with a flawless history. (No, Steve Jobs wasn't perfect -- hiring John Scully was worse than the Qwikster idea).

    Carry on, Fools.

    Anders

  • Report this Comment On August 14, 2012, at 11:01 AM, uaku wrote:

    yah follow the lead of a guy who could not manage successful business model and screwed himself with his poor decisions. Thats a sure shot way to become a Millionaire however the catch is you have to be a Billionaire first

  • Report this Comment On August 14, 2012, at 12:46 PM, Brent2223 wrote:

    I smell a partnership between 2 struggling companies to come. Both FB and NFLX need to distract investors from both broken (or non existent...) business models, and start selling the promise of a brighter future and huge synergies.

    This feels like a you scratch my back I'll scratch yours. Or, maybe Hastings really is just a horrible investor.

  • Report this Comment On August 14, 2012, at 1:06 PM, AmcnFndrs wrote:

    Umm...Zuckerberg had a little bit of an ethics issue at the start of the firm...do we really think that has changed at his ripe old age???

    And as he showed, or stole rather, the idea of facebook is not novel one. How to continue to make money, ethically is what we need to see.

  • Report this Comment On August 17, 2012, at 10:58 AM, MyPortfolioGuide wrote:

    "Don't frown...average down"

    Geesh- Maybe this will eventually come up for air but this was one of the better examples of a lot of sheep hoping to make a quick buck on a hyped up name. How many "investors" could tell you anything of substance about the stock aside from "lots of people are on FB"?

    So glad I told every single client who asked to buy it (@$40 or more)....NO.

    My Portfolio Guide, LLC

  • Report this Comment On August 17, 2012, at 12:04 PM, bobbyk1 wrote:

    Sometimes you make a bet on potential.I bought a quarter of a posistion at 19.35.Will look to buy another quarter at 18.50.If FB figures it out it booms.If not Im not out much.

  • Report this Comment On August 17, 2012, at 5:49 PM, fiswebdesign wrote:

    I have to agree with Kahuna, CFA on the value of FB. I also see them in the $12 dollar range and having built startups and seen so many fail, I didn't see anything unique or special about what Facebook has to offer over any other social network, they're all fundamentally the same and flawed at delivering a decent monetization strategy.

    If I were Zucker, I would have charged for Business pages and would offer an option for people to have more control of their personal page for a small fee, say $5 and a $1.00 a month to maintain it. Give some cool bells and whistles that allow some creativity over normal profiles. I bet you would get all the teenagers and 20 somethings.

    Anyway, if FB drops below $15, I'll start to consider it more seriously, but I want to see some sort of monetization strategy besides the Ads. I've used the Ads and saw poor results compared to Linkedin or traditional Google/Bing.

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