Facebook is worth $5 a share

Facebook shares have already lost nearly half their value. But recent selling suggests Facebook shares have much further to fall. 

Everybody knows the price of Facebook stock has fallen to just above $19, nearly half its value back in May, when it first sold shares to the public. But that plunge is nothing compared with the deluge that's coming.

Last week, I warned that Facebook (FB) will fall to $7.30 a share. I now believe it could trade as low as $5. If you hold the stock and have not sold, you really should do so at once.

What has changed is the quite unbelievable selling of shares by those who until last week were locked in to hold the stock since its initial public offering (IPO) in May. As a reminder, lock-ins of more than 268 million shares expired on Aug. 16. Another 1.7 billion lock-ins will expire by Christmas. That whole process will increase the number of shares that can be traded by 276 percent by the end of November. Many if not most of the folks holding locked-up shares bought them for as little as 50 cents apiece, so even if they sold at $5 they would be banking gains of 900 percent. Not bad.

I expected heavy selling from certain quarters last week. What has horrified me is the selling by a non-executive director of Facebook, Peter Thiel, who dumped $400 million of shares, according to a regulatory filing. at between $19.27 and $20.69 per share. Having already stuck $640 million into his bank account from sales made at the IPO, Mr. Thiel has turned $500,000 into $1 billion of cash and has now sold 36.8 million shares and holds just 5.6 million.

This message could not be more explicit. Thiel knows this company better than almost anyone. He does not need the cash. And having put his name to a prospectus to get other folk to buy stock at $38 in May, he is now happy to sell for less than $20. He has no doubt read all the Wall Street analysts reports saying that the shares are worth $23 to $45. But having read them, based on his intimate knowledge of the company, he does not wish to own the shares.  There could be no clearer message to the rest of the world.

And that message will not be lost on the folk who own those 2 billion shares where the lock-in is still to expire. They too can make the sort of returns you and I can only dream of, even if they sell at $5. The next lock-in expiry is Oct. 14,^h a couple of days after the next quarterly earnings numbers from Facebook. If, as I suspect will almost certainly be the case, the key metric (revenue per user) sees another decline, there will be carnage.

You have a choice. Follow the Wall Street analysts who have got this one spectacularly wrong and buy. Or follow a man who knows Facebook better than almost anyone else on this planet and sell. It really should not be a hard choice to make, should it?

– Tom Winnifrith comments on life, economics, politics, and investments from a libertarian perspective on www.TomWinnifrith.com and a number of British websites, tweets on @tomwinnifrith, and divides his time between the Balkans and London.