Facebook: Don’t Buy the Sequel

05/18/2012 11:21 am EST

Focus: STOCKS

Igor Greenwald

Chief Investment Strategist, MLP Profits

The offering is dangerously overpriced, and the smartest kids in the class will be selling, writes MoneyShow.com senior editor Igor Greenwald.

The final scene of the most expensive movie in human history gets made today, and for $50 or so anyone can be an extra.

All it takes is a share of Facebook (FB) bought on its very first trading day, and sufficient faith in Mark Zuckerberg to pay at least five times the earnings multiple of Apple (AAPL). This for a company that’s growing more slowly, and whose ultimate ability to extract even a fraction of Apple’s profits from the growth it does have remains in serious doubt.

Because make no mistake, this is The Zuckerberg Show, a focus-group tested sequel to The Social Network. In this one, the monomaniacal misfit has matured into a billionaire Internet visionary who raises billions from adoring fans while retaining complete control.

Zuckerberg might yet figure out how to get users distracted by Pinterest, Twitter, and this other social network known as life to not only post their daily content quota, but also click some ads and maybe buy an app or five. But even if he does, the company is going public at a nosebleed valuation, and in all likelihood lacks sufficient growth prospects to justify it anytime soon, if ever.

Revenue increases are already slowing, and cash flow has gone negative as Facebook is forced to ramp up data storage. It’s now the world’s favorite filing cabinet and message board, except that people are too busy filing and messaging to click ever more ads, which Facebook will need them to do as growth inevitably slows.

And no one (besides Apple, that is) has figured out how to squeeze much revenue out of mobile, which is providing ever more of Facebook’s traffic.

Much of the future growth will take place in Asia and Africa, which are very far from Menlo Park, and where success can’t be taken for granted. China, in particular, is nurturing homegrown alternatives while shutting Facebook out.

You’d think the risks would loom larger for buyers, given what’s happened this month to much cheaper stocks with comparable growth rates. Except Facebook isn’t just any stock—it’s a movie about that guy who’s so smart he made Facebook.

And so it’s drawn in a lot of money that wouldn’t be caught holding your ordinary, non-celebrity stock for anything. It’s money from cash balances and, perchance, bond fund profits. Brokers are reporting feverish interest among the sort of people who still have brokers. One called the hype “the greatest Muppet Show on Earth,” using the recent Wall Street term for marks who are also clients.

The hype almost certainly means Facebook shares are headed higher in the short run, even if the window for that run has just been shortened. The standard 180-day lockup period for heavy additional sales by insiders has been cut in half, guaranteeing lots of additional supply during the August dog days.

The expressions of the faces of those hoodie-clad future sellers milling about on their California campus this morning are remarkably like those of kids not much younger than them at a graduation ceremony. And this is a graduation of sorts, matriculating a new class of multi-millionaires.

But anyone buying because these are the smartest kids in the class ought to remember that they’ve already made their money. And they’ll definitely be selling lots more stock. This is one movie best viewed from beyond the exit sign.

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