9 reasons Facebook will crash

The social networking giant's recent 10-Q filing is no comfort.

By Minyanville.com Aug 8, 2012 12:13PM
In order not to feel helpless watching the Facebook (FB) train wreck, we decided to seek guidance from the company's 10-Q. There turned out to be little consolation in the document. 

In short, it ain't pretty. You don't even need to read between the lines since the bad news is literally spelled out.

1. The stock that investors hold, trading Wednesday at $20.72, is all there is. There will be no dividend. Since it's trading at about 30 times next year's estimated earnings, it's hard to argue that it's undervalued. Both Apple (AAPL) and Google (GOOG) trade at approximately 12 times expected earnings. From the 10-Q:

"[Y]ou may only receive a return on your investment in our Class A common stock if the trading price of our Class A common stock increases.

"We do not intend to pay dividends for the foreseeable future."

2. The lock up releases will flood the market with more stock. According to the filing, from Aug. 15 to May 17, 2013, 2.02 billion shares will be released. For context, about 420 million shares are now trading. From the 10-Q:

"Substantial blocks of our total outstanding shares may be sold into the market when 'lock-up' or 'market standoff' periods end. If there are substantial sales of shares of our common stock, the price of our Class A common stock could decline."

3. The tax man cometh for the restricted stock units. According to the filing, about $1.2 billion has already been set aside to cover expenses for the RSUs granted prior to January 1, 2011. However, regarding the RSUs granted on or after that date, the 10-Q says this:

"As of June 30, 2012, there was $2,245 million of unrecognized share-based compensation expense, of which $2,164 million relates to RSUs, and $81 million relates to restricted shares and stock options. This unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately two years."

4. Facebook faces unknown legal expenses and potential settlement claims tied to the "botched" IPO. According to the 10-Q:

"Beginning on May 22, 2012, multiple putative class actions, derivative actions, and individual actions were filed in state and federal courts in the United States and in other jurisdictions against us, our directors, and/or certain of our officers alleging violation of securities laws or breach of fiduciary duties in connection with our IPO and seeking unspecified damages. We believe these lawsuits are without merit, and we are vigorously defending these lawsuits. 

"Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows."

5. Separately, lawsuits relating to patents are not slowing down any time soon. According to the 10-Q:

"We are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and, if resolved adversely, could have a significant impact on our business, financial condition, or results of operations."

6. Facebook predicts user rates will decline. In Facebook's own words:

"We anticipate that our active user growth rate will decline over time as the size of our active user base increases, and as we achieve higher market penetration rates."

7. The decrease in user engagement will have a direct impact on the bottom line. According to the filing:

"Our advertising revenue could be adversely affected by a number of other factors, including: decreases in user engagement, including time spent on Facebook."

8. Facebook is behind the eight ball in terms of monetizing mobile and it fully acknowledges that its users are migrating. In Facebook's words:

"[W]e anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future and that the usage through personal computers may continue to decline in certain markets...

"Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results."

9. Mark Zuckerberg is a wild card, and he plans to be distracted with a lot of new projects. As the 10-Q says:

"Our CEO has control over key decision making as a result of his control of a majority of our voting stock. 

"We plan to continue to make acquisitions, which could require significant management attention, disrupt our business, result in dilution to our stockholders, and adversely affect our financial results.
 
"The requirements of being a public company may strain our resources and divert management's attention."

Read it and weep: Facebook, Inc. Form 10-Q.
37Comments
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Simply put, facebook is for Jr. High kids.  No self respecting adult would use this "site".
Aug 8, 2012 4:13PM
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Everybody keeps screaming about privacy.      Did you ever stop to think for a second that nobody cares about your dog pictures and kids b-day party?        

It has no product.   Advertising on Facebook is a waste of money.     When GM pulled out it told you that it wasn't helping  their business.   Other advertisers will soon figure out the same thing.
Aug 8, 2012 3:52PM
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I just don't trust FB or it's CEO.  Mark Z is young and dumb and he really made a mess of things.  I deleted my FB account before they went public because I didn't agree with their privacy policies and I'm glad I did.
Aug 8, 2012 3:51PM
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FB IS NOT A PRODUCT IT DOES NOT EXIST!!!!!
Aug 8, 2012 4:00PM
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I never could understand this interest in Facebook stock. There are so many attractive stocks that have a good chance of making someone some money, why are people so hung up on a stock that may or not be successful and so far has been a dog. It might be fun for kids (of all ages) but a way of investing to make money, I doubt it.
Aug 8, 2012 3:28PM
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You might add that all accounts are still unaudited and subject to revision as soon as an accountant makes conforming entries.  Facebook has been releasing personal information via bugs sold to internet customers and in violation of their privacy agreements.  Nine billion in capital has been invested in undisclosed market securities by an undisclosed Russian partner.  Both Zynga and DIsney (Playdom) face loss of revenue streams due to Facebooks issuing unwanted e-mail accounts.  Facebook and their directors could face further legal challenges for knowingly releasing false information including knowing that 10% of their accounts were bogus.  It's not a pretty picture but there is still plenty of profit on the short side.  I have not seen a money making opportunity like this since Washington Mutual stole other banks customer lists and then started cold calling people to obtain deposits to prop up their mortgage business.
Aug 8, 2012 5:54PM
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Farcebook was a scam to start with and end with.  They own nothing, build nothing, create nothing.  Where's the value?  I have no idea how many advertising schemes there are or social networks to put the ads before people who are neither reading nor listening but if you think farcebook is somehow unique in this area, you are not very bright.
Aug 8, 2012 6:32PM
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Face book is nothing but a gossip chat room .
Aug 8, 2012 5:54PM
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The '9 reasons facebook will crash' is exactly why I am shorting the stock. If I'm wrong, that's the risk I take. Hope to see under $10 / share. Just like Groupon stock did.

Aug 8, 2012 8:55PM
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If you enjoy your privacy like I do,You have no reason to be in that giant story teller..
Aug 8, 2012 7:09PM
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More and more FB is loading up with ads, unwanted and unneeded apps, weird changes in the way things work and are accessed.  It posts stuff to my time line that I view on the internet whether I want it to or not.  Lately I am a WINNER of a FREE IPAD simply because I looked at my notificationsi.  I'll be running right out and getting that..............................right!.
Aug 8, 2012 7:07PM
Aug 8, 2012 4:54PM
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Facebook crashing? In my Stock Market?
It's more likely than you think!

Also: LULZ at the fail of Failbook Stocks and Mark Suckerberg!

Aug 8, 2012 7:06PM
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nine?? isn't there only one?? Fakebook, it's all smoke and mirriors, FAKE, produces nothing, FAKE, even has FAKE profiles for God's sake, one reason for it to fail, it's FAKE!!! or if u prefer PHONEY!! take ur pic
Aug 9, 2012 11:09AM
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My friend made a facebook account for me and I contacted a few old friends for a while, then all the game friends started and friend requests from sex sites. I'm not stupid but it isn't easy to get rid of the account so I had my daughter take it down for me. Even though it's "down" all i have to do to get it running again is sign in so I have to assume it is still listed as an account and counted as a user. I wonder how many other incative accounts facebook counts when it counts users? Why can't I erase it, it was easy enough to set up.
Aug 9, 2012 2:41AM
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What is scary is that facebook has the ability to see if you are logged into your email. Can they also check to see if you are logged into financial accounts as well?
Aug 8, 2012 3:50PM
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Isn't it strange how all of these GURUS appear when a stock is doing poorly? It is blood letting time.
Aug 8, 2012 4:17PM
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One reason why the Facebooks and Twitters succeed:

 

1.  Americans and many other people throughout the World are increasingly in the embrace of the machine. 

As unfortunate as it might be for humanity, the above human fact is indisputable, despite our calling the process social media.  This bringing to mind the possibility that the socializing is occurring between humans and our ongoing, current technology, and not so much as an intra-species experience of interpersonal relations.

 

Just saying...

Aug 8, 2012 5:54PM
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Um, isn't that standard quarterly financial report disclaimers for ANY corporation?   I did a project 2 semesters ago in college, where we had to analyze and compare quarterly reports.  Amazon v Overstock quarterly reports had almost the exact same language. 

 

P.S:  Both stocks are alive and well, folks.

Aug 9, 2012 2:03PM
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Can anyone tell me who Minyanville.com is?  It would seem important for us all to know more about this particular non-person "author'" if we want to understand this non-entity's point of view.  A pen name is one thing, but a dot com name?....
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