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Why Would a $73 Billion Hedge Fund Company Sell Facebook?

Selena Maranjian
March 12, 2014

The latest 13F season is here, when many money managers issue required reports on their holdings. It can be worthwhile to pay attention, as you might get an investment idea or two by seeing what some major investors have been buying and selling.

For example, consider D. E. Shaw & Co. Founded by David E. Shaw, the firm has a reportable stock portfolio totaling $73.3 billion in value as of Dec. 31, 2013. Shaw is known as a math wizard and a quantitative investing pioneer. His firm is extremely selective when hiring, reportedly accepting about one in 500 applicants -- CEO Jeff Bezos once made the cut.

D. E. Shaw's latest 13F report shows that it has reduced its position in Facebook (NASDAQ: FB) by 45%, though the stock remained its 25th-largest holding as of the end of the quarter. It's also notable that Shaw boosted its calls and puts on Facebook, with those options also constituting meaningful portions of its overall portfolio.

Why hold Facebook?
The company is clearly performing well in the eyes of investors, with its market capitalization recently near $180 billion. That's roughly on par with Toyota Motors, ahead of AT&T and Walt Disney, and not too far from the market values of IBM and Pfizer. That's kind of amazing for such a young company. 

Facebook sports an astonishing number of users worldwide -- more than 1 billion. But to justify its valuation, it needs to make money off all those eyeballs. Thus investors have cheered signs of pricing traction and a growing acceptance of the platform as a viable marketing channel. The company's new video ads are promising, too. In Facebook's last quarter, it reported more than half of its advertising revenue coming from the mobile realm. That's heartening, as investors increasingly see the mobile arena as the future of the Internet.

Savvy buys
Many were dumbfounded recently when Facebook spent $19 billion on the small WhatsApp company, but plenty saw logic in it, as WhatsApp specializes in mobile messaging and has a large international base of users.

It's worth remembering that Facebook has raised eyebrows before with its seemingly pricey acquisition of Instagram, which turned out rather well. Instagram has gone from about 15 million users to more than 150 million, and it has captivated lots of young users, many of whom have not been big users of Facebook. Instagram recently inked an advertising deal with Omnicom that some estimate may be worth as much as $100 million.

Many analysts remain bullish on Facebook, with the stock recently trading near $70 per share, recently getting its target upped by Citigroup to $85 and by UBS Securities to $90. Both rate the stock a buy, with Citigroup seeing Facebook as the Internet's best growth story and UBS liking the company's pricing power, among other things. (Its ad prices nearly doubled in the company's fourth quarter.) Interestingly, the stock has surged so quickly in recent months that though the vast majority of analysts have buy ratings on it, their target prices are below its current level. The stock has been a great thwarter of naysayers so far in its short history.

On the other hand...
Keep in mind, though, that past performance is not always indicative of future results. The WhatsApp acquisition is intriguing and exciting, but it might turn out to be an expensive blunder. There are viable substitutes to it, such as Telegram.

It's worth remembering, too, that if you're bullish on Facebook because of the powerful growth of social media, you have other companies to consider, such as Twitter. Many love it for its