Facebook (NASDAQ: FB) stock recently soared to all-time highs after its strong third-quarter earnings beat. But as many analysts raised their price targets on the stock, one major insider sold nearly half his stake.
According to SEC filings, Facebook board member and venture capitalist Marc Andreessen sold over 900,000 shares of Facebook for nearly $100 million between Oct. 30 and Nov. 6. That represents 45% of his original stake of 2 million shares. Those sales were scheduled under a prearranged trading plan, but they raise serious questions about Facebook's current valuations.
Image source: Facebook.
Andreessen didn't issue a statement regarding the sale, which is unusual for the outspoken tech guru. Speaking to USA Today, Jackdaw Research analyst Jan Dawson noted that while Andreessen's sale isn't an "abandonment of Facebook," it was "unexpected" to see Andreessen stay "so quiet about why he's selling these shares."
Why Marc matters
Marc Andreessen rose to fame as the co-founder of Netscape. In 2009, he co-founded venture capital firm Andreessen Horowitz with former Netscape exec and industry veteran Ben Horowitz. The firm made big investments in rising stars like Facebook, Twitter (NYSE: TWTR), and Pinterest in their early days, and recently bet big on Bitcoin.
Not all of Andreessen Horowitz's investments turned out as well as Facebook and Twitter, but tech investors still pay attention when he makes a big investment. That's why his quiet divestment from Facebook is a bit troubling.
Andreessen also personally uses Twitter much more than Facebook. Earlier this year, he told the New Yorker that he loved Twitter because "reporters are obsessed with it" and that it was like having "loudspeakers installed in every reporting cubicle around the world." When asked about his personal preference of Twitter over Facebook at a recent Facebook panel, Andreessen jokingly claimed that he was "doing valuable competitive analysis."
Why valuations matter
In 2011, Andreessen wrote a Wall Street Journal op-ed piece claiming that the "stock market actually hates technology, as shown by all-time low price-to-earnings ratios for major public technology companies."
That's still true today for many mature tech stocks, but it doesn't really apply to Facebook. Facebook currently trades at 109 times trailing earnings, a steep premium to the average P/E of 36 for the Internet information providers industry. Its P/S ratio of 19 is also more than triple the industry average P/S of 6.
However, companies with robust growth deserve to trade at higher valuations. While there were doubts about Facebook's soaring expenses weighing down its bottom line earlier this year, its solid third-quarter numbers silenced most critics.
|
YOY Growth in... |
Q1 2015 |
Q2 2015 |
Q3 2015 |
|---|---|---|---|
|
MAUs |
13% |
13% |
14% |
|
Revenue |
42% |
39% |
41% |
|
Net income* |
(20%) |
(9%) |
11% |
Source: Facebook quarterly reports. *GAAP.
Looking ahead, Facebook's forward P/E cools down to a more reasonable ratio of 38. That isn't particularly cheap for a company that is expected to grow its annual earnings at 30% over the next five years, but it isn't ridiculously expensive, either. Therefore, investors shouldn't simply assume that Andreessen dumped his Facebook shares because they were overvalued.
Other insiders are selling
It's impossible to know why Andreessen sold nearly $100 million in Facebook stock without an official statement, but investors should note that he's not the only seller.
Over the past three months, Facebook insiders sold 1.54 million shares (including Andreessen's stake) but bought less than 570,000 shares. By comparison, Twitter insiders bought back over 525,000 shares but only sold around 251,000. This is likely happening because Facebook is hitting all-time highs while Twitter is hovering just above its IPO price. But this still represents a stunning reversal from this summer, when Twitter's insiders were dumping much more stock than they were buying.
Insider sales shouldn't always be interpreted as a sign of weakness since they might simply be preplanned employee stock sales. But if the number of insider shares sold consistently exceeds the number being bought, investors should take a closer look.
Should Facebook investors worry?
Shares of Facebook have rallied 40% since the beginning of the year, so it's natural for investors to take some profits. Andreessen's big sale is noteworthy, but investors shouldn't jump to conclusions. For now, investors should look closer at Facebook's valuation and growth potential to decide whether or not the upside potential still outweighs the downside risks.
