Facebook (FB) started its life as a publicly traded company with disappointment. FB stock crashed about 50% in the four months after its 2012 IPO.
However, it’s impossible to overlook the past problems at Facebook and the recent softness in FB stock after a disappointing earnings report in November.
Facebook has been fading lately, and could be returning to the same position it was in back in 2012 — a company plagued by jaded users, challenges to growth and growing Wall Street pessimism.
FB Stock Fades 20% in 6 Weeks
While the broader stock market is up over 4% since mid-October, Facebook stock is down about 20% thanks to a number of concerns including:
Fears of critical mass: Growth among Facebook users in Western markets has slowed to the low single-digits quarter-over-quarter, and after its recent earnings FB admitted it is losing favor with the all-important U.S. teen segment — a group of power-users who visit the site very often and thus generate big ad dollars.
Big Guys Dumping Shares: Silicon Valley mogul Marc Andreessen dumped a third of his firm’s stake in FB stock in November, about 2.28 million shares. This comes after the firm InsiderScore noted big insider selling within FB, too.
Valuation Concerns: Facebook still trades for a forward P/E of 40, and while this is lower than the forward P/E of almost 50 it saw near its peak, that’s still mighty rich even after the pullback. Remember, Facebook traded for half the current price — and half the valuation — last year before this run.
Now, Facebook isn’t going bankrupt or anything. FB stock rolled back after disappointing comments about teen user challenges and news that FB will not be cramming more ads into its pages, but the overall numbers were still strong all around — good revenue, earnings, revenue per user and mobile growth.
But with a stock like Facebook that has been moving a lot on sentiment and now has a pretty high earnings multiple, there’s not room for error. After all, past growth has nothing to do with future returns — and investors are more concerned about what’s ahead for FB stock than any growth it saw in Q3.
And right now, the sentiment is largely bleak about Facebook’s prospects in 2014.
Sell FB Stock
Bringing Instagram users into the fold could produce a short-term boost, but bigger picture many investors are doubting that Facebook stock has a second act after the 2013 surge.
My advice: If you’re sitting on big profits in FB stock, sell now. There’s little chance that the social media stock will eclipse its pre-earnings high anytime soon, and given the big run for many other U.S. equities there are better places to put your money.
If you like tech, take Google (GOOG), which is up 18% from mid-October thanks to continued diversification beyond its dominant online ad business. Or how about Yahoo (YHOO), which is up 11% in anticipation of a big Alibaba IPO.
Or heck, just buy the entire Nasdaq via the Powershares QQQ Trust (QQQ) which is up about 4% in the same period.
The bottom line: You have better stocks to “friend” out there than Facebook right now.
More on FB Stock
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at [email protected] or follow him on Twitter via @JeffReevesIP.