Has Facebook Reached its Peak Value Before the IPO?

One of the co-founders of Facebook is looking to unload $300 million worth of shares in the pioneering social networking company, according to the New York Post.  The question is why.

Sales by insiders in public companies are often a red flag for investors, who often figure that if a hot-shot executive is selling shares maybe they “know something” that others don’t.   Other times, the signal is  less clear like when corporate officers set preplanned sales of stock with the SEC regardless of market conditions.   Everyone from the Google guys to Oracle Corp.  (NADAQ:ORCL) CEO Larry Ellison.  Michael Dell, however, has plunked down several hundred million dollars on shares of his beleaguered company Dell Inc. (NASDAQ: DELL) which he considers to be undervalued.

What’s happening in the case of Facebook isn’t clear.   The Post isn’t even sure of the identity of the seller or why the sale is taking place. Given the huge interest in next year’s expected Facebook’s IPO, it’s hardly shocking.

“It has not been revealed which co-founder is interested in parting with the significant chunk of the red-hot tech company, but there are only four possibilities: CEO Mark Zuckerberg or co-founders Chris Hughes, Dustin Moskovitz or Eduardo Saverin,”  the newspaper says.   “The market for private shares in Facebook is smoking hot, with Wall Street banks, venture capitalists and everyday investors looking to buy.”

The 1 % stake being shopped equals about 10 million shares priced at $30 on the secondary market.   What’s missing from the Post’s story is context such as what percentage of the co-founder’s stake is being sold or specific data on how shares of Facebook have performed in unofficial trading.   Say they doubled in the past year.   It would be crazy for a Facebook co-founder to take some profits to diversify their holdings because financial planners would advise him not to put all of their eggs in one basket, even if it happens to be a $50 billion valuation.

Plus, these executives should remember their Internet history which is littered with the corpses of companies that were once considered the next big thing.

Businessweek, for example. reported in 2008  that “people in the know say Digg is easily worth $200 million.”  The story, which was on the cover of the magazine, proved embarrassingly wrong.  Digg’s traffic has fallen off a cliff and last year the company fired about half its staff and is working to refocus the product, whatever that means.  Remember when Friendster seemed like an unstoppable force of nature and when Rupert Murdoch was going to make MySpace the focal point of News Corp’s Internet strategy?   Friendster, which sold itself to a Malaysian company in 2009, is still around but is largely overshadowed by Facebook. MySpace is circlking the drain as well, losing money and cutting staff

So, the lesson for a person lucky enough to own shares of Facebook is simple: get while the getting is good.   Selling shares makes infinite sense to them and probably to the hordes of eager buyers.  Whether they will feel that way over the long-term remains to be seen.

–Jonathan Berr