The Ultimate Insider Cashing Out of Facebook


Gather a group of friends and pile into a skyscraper elevator, then have someone sever the main cable. That's the "social experience" Facebook (NAS: FB) shareholders have suffered since the IPO, with the shares shedding nearly 50% of their value relative to their $38 offering price. That type of drop inevitably attracts the attention of bargain hunters, but there is reason to believe the shares are no bargain, even after a 50% haircut. News that Peter Thiel, a Facebook director and its first outside investor, has now sold the bulk of his shareholding suggests it is still too early to get on this elevator.

A finger in some very juicy pies
Maybe you've never heard of entrepreneur/venture capitalist/global-macro-hedge-fund manager Peter Thiel, but you've certainly heard of some of the companies that he has been involved with at the highest (or earliest) level. Arguably Silicon Valley's savviest and best-connected investor, Thiel co-founded PayPal, the enormously successful payment platform that was ultimately acquired by eBay. One of PayPal's directors was Reid Hoffmann, the co-founder and current CEO of professional networking site LinkedIn (NYS: LNKD) . Sure enough, Thiel was an angel investor in LinkedIn (as well as in social game maker Zynga (NAS: ZNGA) ).

Thiel had already taken the opportunity to unload 16 million Facebook shares at $38 in the IPO; last Thursday and Friday, he followed up with a sale of 20 million shares at an average price of $20. His remaining stake tallies up to about 7 million shares. Given the fabulous gains he has already realized on the investment -- on the order of $1 billion -- that position is pure risk capital, a near costless option he can hold on any upside.

Two social networks. You decide
It is a pointed difference between the two social networks that Thiel has so far retained his entire LinkedIn investment, despite the fact that the professional networking site is more expensive on traditional valuation measures. Yesterday, Facebook shares closed at 69 times trailing-12-month EPS. The equivalent multiple for LinkedIn is listed as "not meaningful," per data provider S&P Capital IQ, indicating it is stratospheric (the actual figure is 844). That leads me to conclude that Thiel believes LinkedIn is a much superior business to Facebook, with much better growth prospects.

Don't break this Peter principle
If you think you have a better understanding of Facebook and its industry than Thiel, you're welcome to pile into the shares now, but betting against one of the most successful technology investors in Silicon Valley is not the kind of wager I look for.

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