The Ultimate Insider Cashing Out of Facebook

Gather a group of friends and pile into a skyscraper elevator, then have someone sever the main cable. That's the "social experience" Facebook (Nasdaq: FB  ) shareholders have suffered since the IPO, with the shares shedding nearly 50% of their value relative to their $38 offering price. That type of drop inevitably attracts the attention of bargain hunters, but there is reason to believe the shares are no bargain, even after a 50% haircut. News that Peter Thiel, a Facebook director and its first outside investor, has now sold the bulk of his shareholding suggests it is still too early to get on this elevator.

A finger in some very juicy pies
Maybe you've never heard of entrepreneur/venture capitalist/global-macro-hedge-fund manager Peter Thiel, but you've certainly heard of some of the companies that he has been involved with at the highest (or earliest) level. Arguably Silicon Valley's savviest and best-connected investor, Thiel co-founded PayPal, the enormously successful payment platform that was ultimately acquired by eBay. One of PayPal's directors was Reid Hoffmann, the co-founder and current CEO of professional networking site LinkedIn (NYSE: LNKD  ) . Sure enough, Thiel was an angel investor in LinkedIn (as well as in social game maker Zynga (Nasdaq: ZNGA  ) ).

Thiel had already taken the opportunity to unload 16 million Facebook shares at $38 in the IPO; last Thursday and Friday, he followed up with a sale of 20 million shares at an average price of $20. His remaining stake tallies up to about 7 million shares. Given the fabulous gains he has already realized on the investment -- on the order of $1 billion -- that position is pure risk capital, a near costless option he can hold on any upside.

Two social networks. You decide
It is a pointed difference between the two social networks that Thiel has so far retained his entire LinkedIn investment, despite the fact that the professional networking site is more expensive on traditional valuation measures. Yesterday, Facebook shares closed at 69 times trailing-12-month EPS. The equivalent multiple for LinkedIn is listed as "not meaningful," per data provider S&P Capital IQ, indicating it is stratospheric (the actual figure is 844). That leads me to conclude that Thiel believes LinkedIn is a much superior business to Facebook, with much better growth prospects.

Don't break this Peter principle
If you think you have a better understanding of Facebook and its industry than Thiel, you're welcome to pile into the shares now, but betting against one of the most successful technology investors in Silicon Valley is not the kind of wager I look for.

If you want one of our top tech analyst's thoughts on the stock make sure to check out this brand-new premium research report on Facebook. Inside, you'll receive a comprehensive assessment of the risks and opportunities, as well as all of the key issues to understand before investing. Claim your copy today by clicking here.

Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio; you can follow him @longrunreturns. The Motley Fool owns shares of Facebook and LinkedIn. Motley Fool newsletter services have recommended buying shares of LinkedIn and Facebook. The Motley Fool has a disclosure policy.

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Read/Post Comments (18) | Recommend This Article (51)

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 21, 2012, at 5:13 PM, OklaBoston wrote:

    If you've studied IPO cycles as much as I have this should come as no surprise. If I had stuck with what I know about such cycles and not developed a fascination with earnings surprises my score and rating here would be much higher.

    Long story short IPOs rarely rate green thumbs while still above the IPO price. Even the best tend to be overpriced for 6 months to a year and then go from overpriced to underpriced.

  • Report this Comment On August 21, 2012, at 5:17 PM, ennuime wrote:

    I notice some of my Facebook "friends" aren't as gung ho as they were just a few weeks ago. I think it will take another 6 to 9 months to see what the real user-ship will turn out to be. I call it a "Peak and Ebb" website.

  • Report this Comment On August 21, 2012, at 5:46 PM, chris293 wrote:

    All the hype, shady problems, and competition for an IPO like this screamed 'Buyer Beware', and of course an IPO usually tanks in the first year before it comes back that is if it ever does.

  • Report this Comment On August 21, 2012, at 5:58 PM, TMFHelloNewman wrote:

    Nice piece, Alex.

    To be fair, he planned to sell these shares back in May detailed in the "10b5-1" filing, and he still holds more than 5 million shares - though what that $100m means to him who knows.

  • Report this Comment On August 21, 2012, at 6:43 PM, toastedseeds wrote:

    I'm not sure I agree with your assessment of Thiel holding onto LinkedIn. It may be that he can't get good value from it today, not so much he thinks it's a superior business. His selling FB certainly indicates he thinks hs can invest that FB money in something else that will give him a greater return over the next 5 years.

    ts

  • Report this Comment On August 21, 2012, at 7:29 PM, tdelahousaye wrote:

    Well this is going to be an awkward BoD meeting...

  • Report this Comment On August 21, 2012, at 7:46 PM, EASYMONEY00 wrote:

    Be fearful when others are greedy and greedy when others are fearful. I am holding my shares to see how it plays out in the future.

  • Report this Comment On August 21, 2012, at 9:11 PM, nwaluli wrote:

    FB is deriving income from advertising. Google is the million pound gorilla in that space. FB needs to come up with some "gotta have" program or commodity. If they don't, I think they end up at $5 a share. If one wants to take a gamble on a stock right now, I think RIMM, dying on the vine, but holding interesting proprietary programs might have better upside.

  • Report this Comment On August 21, 2012, at 9:28 PM, JGBFool wrote:

    I think FB still has value-- it is bringing in money, and people still use it. I have no idea what the share value is, though.

  • Report this Comment On August 21, 2012, at 9:42 PM, nerver3putt wrote:

    I would have sold LNKD along with FB. LNKD is so overpriced, it might be a good company but how good is it at the current P/E. Do the math.

  • Report this Comment On August 22, 2012, at 7:28 AM, petrogold wrote:

    Alex,

    I observed one thing that if Motley Fool could make any rating down by its reviews & it continues falling until doomsday. Why not FB CEO & board of Dir-FB does look into it positively for rasing its rating? Ultimately Motley Fool could salvage FB if wishes!

  • Report this Comment On August 22, 2012, at 10:31 AM, TMFAleph1 wrote:

    @petrogold

    I think you're observing a spurious correlation. The Motley Fool's impact on Facebook's share price is essentially epsilon -- particularly since some of the articles are positive, while others are negative.

  • Report this Comment On August 22, 2012, at 12:01 PM, hbofbyu wrote:

    Almost everyone I know is a member of Linked-in. I have yet to see anyone I know who has found any value in it. How is it supposed to change in the future? And how do they generate revenue?

  • Report this Comment On August 22, 2012, at 2:20 PM, Archaeologist77 wrote:

    Question: what about valuations of Facebook shares held by employees of Facebook for the IRS?

    Do Facebook employees pay tax on the shares they own based on the IPO price of a price at time of assessment or other?

    Someone in the know, fill us in.

    And as for Peter Thiel - he's a Venture Capitalist. He uses his money to earn money with strategic investments in new companies. Why would he hold Facebook? The point for him, and I'd do the same if I was him, is to sell his shares to get his return on investment. Makes sense to me and has nothing at all to do with Facebook's future.

    That's my take as a daily user of Facebook who accesses the social network multiple times each day. I also bought shares in the IPO to learn about IPOs and, as a less than 1 year old investor in Equities, to assess whether I'll ever invest in an IPO again. I won't. Lesson learned, although I guess I could've learned the lesson without investing, but glad I did as it's good to feel the sting of not listening to the advice of seasoned investors. Regardless, I'm holding my Facebook shares.

  • Report this Comment On August 24, 2012, at 2:09 PM, whyaduck1128 wrote:

    Has been right therefore always will be right. It's a common and erroneous assumption on the part of the Fool's writers and others, here most often used as the baseis for slobbering over every move and utterance of Warren Buffett.

    Before we proclaim Mr. Thiel the next Oracle, I'd like to know his overall track record, all the items he's been right about as well as those he's been wrong about, not just LinkedIn. I'd also like to know why his past success indicates some sort of prescience about facebook's future.

    Long on FB, but not for very many shares, bought at $20

  • Report this Comment On August 24, 2012, at 4:01 PM, mikecart1 wrote:

    Haha whyaduck1128,

    I agree with Warren Buffet opinion. However, you and I will have to read more of his godlike ability in investing after his BAC call a year ago returns billions to him. I'm just glad I'm a large BAC shareholder as well lol.

  • Report this Comment On August 24, 2012, at 5:30 PM, whyaduck1128 wrote:

    Don't get me wrong. I'm a fan of Mr. Buffett, and he's been right far more than he's been wrong, and usually for bigger amounts. However, he's not infallible, and it's ironic that he's the first to admit it while MF continues to slobber all over his every move and utterance.

    Meanwhile, I have less than 1% of portfolio in FB, enough to be worth some attention and not enough to be a significant worry.

  • Report this Comment On August 28, 2012, at 6:21 PM, gilsh wrote:

    I think that the difference between Facebook and Linkedin is clear. FB's way to make real profit is still unclear. It will remain unclear as long as the privacy issues is unresolved. Linkedin, on the other hand, has its road paved, as slow as it may take, to make lots of money out of the job recruitment market. Today, Tomorrow and in a hundred years time Linkedin's business plans will make sense.

    Facebook's business plan looked good as long as everyone thought it will make tons of money by using the information users supply it intentionally and unintentionally. As it becomes more and more clear that most of this information is commercially unusable at the moment, FB has a serious strategic problem. Google at least knows what a user is looking for at this particular minute (he is search using specific words). FB does not have that knowledge. At a certain point in the future, FB's MANAGEMENT will have to choose honesty-regardng-privacy or profitability. When you see FB-motivated change-privacy-policies campaigns around the developed world, you'll FB has taken off the gloves, and then it will be the time to start looking again into FB stokcs. Till then, as an investor, I foresee it falling further.

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