Fellow Fool Alex Dumortier recently put together a great article on why Peter Theil selling shares of Facebook (Nasdaq: FB) should be an indicator that we all should be selling or, at the very least, avoiding the company as an investment. His point couldn’t be made clearer then with this closing argument:
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.
History repeating Itself
I believe that Alex really makes a good point; most of us average Joe investors aren't going to know as much about Facebook as Theil does. I would also say that in 2002, there were probably very few people, if anyone, who knew more about PayPal than Peter Theil -- and he sold it to EBay (Nasdaq: EBAY) for $1.5 billion dollars. At the time, it looked like a great deal for Theil -- PayPal had a revenue run rate of $160 million, and losses of $80 million. The country was still in a recession from the dotcom bubble bursting, and anything dealing with the Internet or tech was definitely not in 'favor.'
But, this past November, a technology writer for Forbes dubbed the selling of PayPal as "The Worst Tech Decision in the Last 10 Years." The author, Eric Jackson, valued PayPal at $30 billion, or roughly three quarters of EBay’s total market cap, when he wrote the article almost a year ago, and others say it's worth even more now. Regardless of PayPal's current price, the fact remains that Peter Theil sold out way to early.
Better Opportunities
Alex also made a great point when he noted that, while Theil sold his shares of Facebook, he has held onto shares of LinkedIn (NYSE: LNKD). By Alex’s calculations, Facebook is selling at 69 times trailing 12 month EPS, and LinkedIn is selling for 844 times. While most investors will tell you that Facebook’s stock is overpriced and not to buy it, they clearly don’t have the risk tolerance for LinkedIn. But Peter Theil clearly does.
Theil’s a venture capitalist -- he risks large sums of money in start-up companies that may or may not ever turn a profit. He's an extremely well-connected guy in Silicon Valley, and has access to nearly every new tech idea. He also started the 20-under-20 Fellowship, which helps bring ambitious ideas and projects to life. He's given the opportunity to invest in the fastest growth period a company will experience, the first few years, and that’s when huge sums of money can be made extremely quickly.
Facebook is still growing. Revenue increased 32% over the same quarter a year ago, and daily, monthly, and mobile users are all growing at above 29%. But it doesn’t compare to the rates at which a start-up can grow. Theil simply has better opportunities to make fast cash outside of Facebook. Unfortunately, the average investor doesn’t have access to these prospects.
Foolish Take
Most of us would take a 10% return in two years over a 3% yearly return for the next five years, and I believe Peter Theil is the same way. He can invest in companies that are growing faster than Facebook, so good for him. But, at the end of the day, this doesn’t mean Facebook’s stock is terrible. Theil still owns close to 7 million shares in the social network and, as the PayPal example proved, his selling doesn’t mean that growth is over.
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