1 Ominous Sign for Facebook No One's Talking About

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Shares of social-network titan Facebook (NAS: FB) have taken a severe beating since their May 18 IPO. Since then, shares have fallen more than 40%, in part because of a disappointing quarterly earnings report June 26. But Facebook's not done with its fall yet. I think we'll see shares continue to lose value thanks to two little but expensive words: lockup period.

Watch the lockup period
The lockup period, a period of time post-IPO when owners can't sell their shares, usually lasts 90 days.

But Facebook has a staggered, two-date lockup period, one ending on Aug. 15 (90 days post-IPO), and another on Nov. 13. On these two dates, 268 million and 1.24 billion shares, respectively, will be available for sale. For a company with 2.14 billion shares outstanding, this poses a very real threat of flooding the market.

Of course, just because insiders can sell, doesn't mean they will, especially given the downward trajectory of the stock recently. But if we take a look at some similar dot-com stocks like LinkedIn (NYS: LNKD) , Zillow, and Pandora, we see that the market does become a bit overwhelmed with sell orders. Their shares traded an average of 3% lower just a week after the lockup expiration ended.


A 3% drop doesn't exactly amount to a massive sell-off, but it's still no good for investors. And while the longer-term relationship between the end of lockup periods and share performance isn't conclusive, you can bet there's more than one Facebook paper millionaire waiting to become a real one.

Not everything about social media stinks
Not everything about Facebook screams "overvalued!" As Foolish commentator Rick Munarriz pointed out in a recent piece, it has some undeniably attractive aspects to its business. The company has nearly a billion users and growing, it has a lot of cash, and it's working proactively to put itself in the right areas for long-term staying power.

As long as we're talking social Internet companies, LinkedIn looks like the better choice -- although I still wouldn't touch it from the safety of a fire-resistant hazmat suit with a 10-foot pole.

Instead of relying almost entirely upon advertising for revenues as Facebook does (85% of 2011 revenues were from advertising -- yikes!), LinkedIn makes an increasing proportion of its money from "hiring solutions" -- a service with wild demand in the current economy. So LinkedIn, the "professional social network," will naturally focus on a smaller but more affluent market segment. In Q1, LinkedIn reported year-over-year member growth of 58% -- twice the growth of Facebook membership -- and had 160 million members.

On top of that, LinkedIn announced that it will be integrated into future versions of Microsoft Office, which will instantly familiarize millions of users with LinkedIn's interface, adding a lot of value to LinkedIn's business.

All the same, I would still stay away from its stock. A P/E 40 times higher than the industry average and a price-to-sales ratio four times higher than industry averages simply aren't justifiable for a company in an industry with insanely low barriers to entry. By no means is LinkedIn a buy, but when it's all said and done, it's still a better buy than Facebook.

Too many questions, not enough answers
At the end of the day, there are just too many uncertainties in Facebook's future for me to be comfortable putting my money into it as a rational investor. When the CEO shows up to the quarterly conference call and it's lauded as a bullish indicator, as is having the stock hitting a new all-time low, you can count me 100% out.

In fact, I've rated both Facebook and LinkedIn as "underperform" on my CAPS page. If I could I'd rate them both "super double underperform," but unfortunately that's not allowed.

Facebook and LinkedIn are already extremely well-known, widely used services. The time for investors to make massive returns in a short period of time has come and gone (or has yet to arrive for one of these two companies). But if you're interested in reading about the longer-term Facebook play, you can pick up a copy of the Fool's new premium research report on Facebook.

The article 1 Ominous Sign for Facebook No One's Talking About originally appeared on Fool.com.

Fool contributorJohn Divineowns none of the stocks mentioned in the story above. He kind of hopes Facebook starts charging users soon, though, so that he'll stop using it. You can follow him on Twitter,@divinebizkid, and on Motley Fool CAPS,@TMFDivine.The Motley Fool owns shares of Facebook and LinkedIn.Motley Fool newsletter serviceshave recommended buying shares of LinkedIn and Facebook. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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