This $25 Billion Hedge Fund Sold Facebook Inc. Should You?

See if you find the reasons to buy Facebook more compelling than the reasons to sell.

Aug 29, 2014 at 7:32PM

Source: Facebook.

We should never blindly copy any investor's moves, no matter how famous, talented, or successful the investor. Still, it can be useful to keep an eye on what smart folks are doing. 13F forms can be great places to find intriguing candidates for our portfolios.

For example, a glance at Lone Pine Capital's latest quarterly 13F filing shows that it closed out its position in Facebook (NASDAQ:FB), selling 2 million shares that would be worth $148 million at the recent share price.

Why pay attention to Lone Pine Capital?
Lone Pine Capital, founded by Steve Mandel in 1997, is one of the biggest hedge fund companies around, with a reportable stock portfolio worth $24.7 billion as of June 30. It has reportedly outperformed the S&P 500 handily since inception. Like many value investors, Mandel is known to dig deep into companies, aiming to buy undervalued businesses.

Why sell Facebook?
Why would anyone want to sell shares of Facebook? Well, some fear that it's overvalued -- after all, the stock is up over 80% in the past year and more than doubled in 2013. Its recent P/E ratio tops 90, and even its forward-looking P/E approaches 40.

Another concern bandied about is that many teens have lost interest in the site, favoring other platforms such as Snapchat and Instagram. Still, the teen shrinkage factor appears to not be as bad as feared -- and besides, Facebook owns Instagram.

Also consider a Warren-Buffett-style reason to sell (or, really, not to buy in the first place): Facebook is in a fast-changing competitive landscape, and it's pretty much impossible to estimate how it will be doing in a few years. The company's momentum is strong, and its scale and network effects give it great competitive advantages, but Facebook could still fall out of favor and lose ground to a rival.

From Fbs Fb Page
Photo: Facebook.

Why buy Facebook?
Despite all those concerns, there is still ample reason to buy or hold Facebook stock. Let's start with its valuation, which doesn't seem so sky-high if you factor in the company's growth rate, free cash flow of more than $3 billion annually, and rising profit margins. (Its gross margin was recently around 80%, and net margin tops 23%.)

In Facebook's strong second quarter, revenue surged 61% from a year ago, earnings per share more than doubled, and 61% of advertising revenue came from its mobile platform, up 50% from the year-ago level. The mobile realm is becoming more and more important as digital advertising grows briskly. Facebook is taking market share in that arena -- largely at Google's expense -- and is also a key player in video ads.

Beyond its strong current performance, Facebook is also poised for significant future growth, including from international users in developing markets. The company sports roughly 1.3 billion average monthly users, and every penny collected from each of them adds up to a lot of money. There's a lot of potential for this company if it keeps executing well.

As an example of how Facebook can extract value from its users beyond selling advertising, consider that the company is testing a "Buy" button on its pages as it aims for a bigger piece of the e-commerce pie, which is estimated at $262 billion this year and near $370 billion by 2017.

Lone Pine Capital may have sold off its Facebook position, but risk-embracing investors might want to consider buying instead -- or at least adding it to a watchlist and waiting for a pullback. (Note, though, that I waited for a pullback when shares were in the low $20s. They recently approached $80, and I'm still waiting.)

Here's another place you might find Facebook
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of Apple and Google (C shares). The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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