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Is Jana Partners Shorting Facebook?

Facebook (NASDAQ:FB) has slumped 25% since its IPO (though it has recovered from its lows), as the highly anticipated offering drew media attention and interest from retail investors but little acceptance from Street investors. While Facebook, unlike many of the dot-coms of the late 90s, does generate profits (and, for that matter, revenue), even after its decline in share price the market capitalization is over $60 billion- 70 times trailing earnings and 15 times trailing revenue. Again, Facebook’ s fundamentals easily put its valuation in the billions, but these multiples may be too high. With an earnings release looming, and investors pulling back about 10% so far this month, it may be wise to examine the social network’s growth potential and whether or not it can deliver the value its stock price promises.

Barry Rosenstein JANA PARTNERS

The company has not been public long enough to gauge hedge fund activity, and 13F documents filed with the SEC do not disclose any short positions in any case. However, some fund managers have tipped their hand publicly in regards to their stance on the company. JANA Partners issued a letter to it investors describing its Q2 performance and declared that it was short, among other companies, “a social networking company with decelerating growth and difficulties monetizing traffic.” This is likely a reference to Facebook’s slower growing user base (read what JANA Partners last reported owning).

Facebook’s peers have had a variety of reactions to the IPO and its aftermath. Zynga (NASDAQ:ZNGA), which makes online social games for Facebook (the source of about 90% of Zynga’s revenue) and some mobile platforms, IPO’d in December at a value of $10 per share. After peaking above $14 in early March the stock price has steadily fallen and currently sits at around $5 amid worries that revenue is flattening even as the company invests heavily in R&D for what are being increasingly seen as fad-driven games. Google (NASDAQ:GOOG) has started its own social networking site, Google Plus, in an attempt to compete with Facebook and of course the company earns much of its revenue from the same targeted ad model that Facebook does. Google’s long-running search business is a more stable, reliable money maker than either Facebook or Zynga has but its stock has also slumped this year, down close to 10% year to date. It has therefore lost about as much market capitalization this year- about $20 billion- as Facebook has since its IPO.

Yet Facebook’s closest peer, social/career networking site LinkedIn (NYSE:LNKD), continues to soar: its stock price is up 60% so far in 2012. By some metrics LinkedIn is even more overvalued than Facebook, at 700 times trailing earnings and 17 times trailing revenue. LNKD has lower margins due to considerable operating expenses- its trailing net profit margin is 2.4% versus Facebook’s 24%- and in recent quarters these operating expenses have grown as rapidly as revenue. The two social networks’ 5-year PEG ratios, which put their stock prices in the context of projected growth over a longer period of time, are both between 2 and 2.3.

Facebook is expected to announce quarterly earnings of 12 cents per share and revenue of $1.15 billion on Thursday, July 26th. We think investors should be out of the stock and possibly short if they have the patience to maintain their position for the medium term; the stock’s valuation still looks too high.

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