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I have written here a number of times that the Facebook (NASDAQ:FB) stock price will collapse. So far so good. Shares in the Nasdaq darling now trade at $21.71 down from a $38 IPO. But folks, it is about to get much worse. Much much worse. This remains a stonking short ( perhaps the No 1 big cap short on this planet) and if you were stupid enough to buy the shares I would get out now. They will have halved again ( or worse) before Thanksgiving.
Why $7.30? Well read my analysis HERE – even at that level it would still trade on a premium rating. But I was being generous with that valuation since. a) the quarterly earnings numbers the other day highlighted to anyone with half a brain cell that there is no real earnings visibility going out for more than a few months and that some key metrics (revenue per user) are already trending south. And b) those law suits from those folks who bought into the IPO and claim they were misled have not gone away. Another duff quarterly earnings statement and a further share price collapse and things could get nasty in the Courts. What profits Facebook actually makes by persuading advertisers to try to sell to its half-witted user base could be swallowed up many times over by legal costs and damages before this is all concluded.
So why the impending share price collapse? Well it is all to do with the impending expiry of lock-ins by insiders (i.e. early stage investors who paid peanuts for the shares). Billions of shares are set to be released from lockup in 2012. The lock-up expiry starts in August and will increase Facebook’s float by 276% by November. On August 15th 268 million shares will be released from lock-up (more than half the shares offered in May). This will be followed by 247 million released on Oct 14th, 1.33 billion on November 13th and 124 million on December 13th.
Putting this in context. Yesterday there were 384,898 shares in this company traded on Nasdaq so a potential overhang of a couple of billion makes a difference. But why should the insiders sell now? For starters they know better than anyone that the stock could easily fall by another 70% and still not be cheap. Secondly many of them they paid peanuts so are still well ahead even at $7. And thirdly, the word in the US is that Capital Gains Tax will increase in the 2013 tax year which starts January 1st. And so why not sell now and pay less CGT?
I am not saying that all of the insiders will sell. But you can bet your cotton socks that some will and give the size of the soon to be released insider position relative to daily trading volumes, this will have a mammoth impact. On a 6 month view Facebook has to be the world’s simplest and most obvious candidate for short selling. $10 or below by Thanksgiving – that’s the call.
