Buy Facebook When Insiders Are Selling

More than a few Facebook (NASDAQ: FB  ) bigwigs have been cashing out in recent days.

A series of SEC filings yesterday reveals that COO Sheryl Sandberg, VP of engineering Michael Todd Schroepfer, and board members Marc Andreessen and Donald Graham have all unloaded some of their shares in the world's leading social networking website.

There's no reason to panic.

For starters, the shares being sold are a sliver of the overall stakes held by the insiders. Some are taking advantage of the selling window to diversify their portfolios, ahead of next year's likely tax hikes. Some are raising money to pay this year's tax bills.

They're also not all selling. CEO Mark Zuckerberg has committed to hold his shares through at least next September.

Bailing at the worst possible time
Some investors will follow the SEC Form 4 breadcrumbs out. They will unload Facebook shares that are already well below May's $38 IPO price, largely because they believe that the insider selling represents the smart money voting with their sell orders. Unfortunately, that would be a pretty dumb reason to move on.

When it comes to potential catalysts, there are far more positive developments than negative ones.

  • An expanded roster of merchants will be part of Facebook Gifts, the site's upcoming e-commerce platform. Hello, Amazon.com (NASDAQ: AMZN  ) .
  • Zuckerberg revealed two months ago that he has a team working on search. Hello, Google (NASDAQ: GOOGL  ) .
  • Nearly 88 million shares of Facebook were sold short as of the end of October, a record high in the company's brief public tenure. Hello, short squeeze.

Cynics will argue that Amazon.com and Google have nothing to worry about here. They're right. Amazon (with a market cap that is roughly twice that of Facebook) and Google (at four times Facebook's valuation) are pretty far along as market leaders in their areas of specialty. Surely no one can improve on what they are doing.

Then again, Facebook is raising the bar. Social gifting will be huge, and unlike Amazon, Facebook knows who your friends are and what you like. The same benefits apply to social search. Facebook has the potential to serve up better query results than Google to questions when it knows more about the person and person's friends.

Threats have become opportunities
A year ago, Facebook was relying too much on display advertising and Zynga (NASDAQ: ZNGA  ) . The social gaming giant accounted for as much as 18% of Facebook's revenue at its peak.

It was a bad place to be, and that was before Zynga's bookings began to retreat sequentially this year.

Facebook's online advertising business has been strong, but it can be a finicky source of revenue for social networking websites. China's Renren (NYSE: RENN  ) hit a fresh low last week after posting a 14% year-over-year decline in display advertising.

This all points to the importance of Facebook making a dent as it expands into e-commerce and search.

We also can't forget about mobile.

Until last month, the market viewed this as a liability. Would Facebook be able to monetize the booming mobile usage? The company still has a long way to go on that front. Just 14% of its ad revenue in the third quarter came from mobile devices, but 60% of its billion monthly active users are now interacting with Facebook -- at least in part -- through mobile apps

However, Zuckerberg's remarks during last month's call soothed the fears.

"Our opportunity on mobile is the most misunderstood aspect of Facebook today," he said. "I believe that over the long run we're going to see more monetization per time spent on mobile than on desktop."

It may just be lip service, but it framed the argument in a new light. Since mobile is largely incremental, if Facebook can encourage sponsors to pay more to reach mobile users on smaller screens where ads as sponsored posts are harder to avoid, Zuckerberg will actually be on to something.

So who cares if wealthy insiders are cashing in on a few of their chips? They've earned that right. The question to ask is if it would be smarter to be a buyer or a seller of Facebook's stock here. With so much that can go right this quarter and early next year, following those SEC Form 4 breadcrumbs out the door would be a costly mistake.

A world of opportunity
There's a new premium report on Facebook detailing the opportunities and challenges in store for its shareholders. The report includes a full year of updates, so time's ticking. Click here to check it out now.


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  • Report this Comment On November 22, 2012, at 2:56 AM, showmethemonet wrote:

    "where ads as sponsored posts are harder to avoid": making a business out of annoying people, one cluttered feed at a time...

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