The Perfect Short-Term Play Against Facebook?

Facebook Inc. (NASDAQ:FB) went from being the highest internet IPO on record — at $38 a share — to the biggest stock market embarrassment of the year — with estimated losses of more than $34 billion in market value. If you were reading us then, you would have known that from the beginning, this was the investor�s �stupid test�.

Investors eventually — and stubbornly — lowered their expectations for Facebook, since the company has shed nearly half its market value since it went public.

But with renewed optimism about their mobile strategy� the question is coming up again: can they monetize their billion users� or will they regress again and fall to financial ruin?

Today, I�m going to show you why the company is still likely going to crash and burn. And with recently renewed optimism in it, and options contracts at some of the cheapest levels, now could be the perfect time to be a contrarian, and (at least) make a short-term play against the company.

Back in May, our friend Dr. Steve Sjuggerud at Daily Wealth made it clear:

�Look, if Facebook grew its sales 50-fold � from roughly $4 billion to roughly $200 billion � its shares would STILL be more expensive than Wal-Mart shares (based on the price-to-sales ratio).

Dreamers think that Facebook will come up with new ways to make money. Facebook needs to dream up 50 times more revenue than it has today. So far, that isn’t happening��

To summarize, he says�

�In short, Facebook’s business isn’t growing nearly fast enough for the stock to be worth buying today.

This Facebook hype is just like the hype back at the peak of the dot-com days in 2000, when everyone wanted Internet stocks at crazy prices � even when they had no money-making business model.

Facebook shares are not cheap and ignored. They are the complete opposite � they are outrageously expensive and insanely overhyped. If you want to make money as an investor, this is NOT what you want to buy.

And if you do want to buy it, you’ve failed the Stupid Test.�

So, where are we now? It�s been roughly 7 months�

Have they increased sales? Is now a good time to invest?

We think not.

ValueWalk says,

�After a review of Facebook Inc (NASDAQ:FB)�s recent SEC filing, it will take until the middle of next year for the company to earn operating income to offset its $2.3 billion stock-compensation costs.�

They�re talking about when restrictions were lifted Nov. 14 on 804 million shares held by former employees, along with those who sold at the initial public offering in May, which almost doubled the number of publicly available shares for trading… diluting the overall supply.

And here�s some more embarrassing news�

Despite early investors having their shares released from lock-up, some have had to liquidate their holdings in order to raise funds to pay tax on their holdings.

• �Donald Graham, chairman and chief executive of the Washington Post and a director on the board of Facebook sold about $6.7 million worth of the shares on Monday, according to a regulatory filing.
• �Marc Andreesen, one of FB�s board members, sold shares in the company worth $54 million to pay his tax dues.
• �Chief operating officer Sheryl Sandberg also sold shares worth $4.2 million according to a filing.
• �And engineering vice president Michael Schroepfer sold a little more than $1 million worth of shares in recent days.

Needless to say, the company is now desperately trying to assuage its current investors.

They must monetize their billion-plus users throughout the world or face complete financial ruin.

For the long haul, their success will depend largely on their mobile market strategy.

But here�s their most recent experiment� which in my opinion is extremely overhyped. This inflated optimism is worth taking advantage of in the short term, at least, as it�s still highly speculative.

According to the New York Times Daily Report Blog,

�Facebook is already privy to its users� e-mail addresses, wedding pictures and political beliefs. Now, as Somini Sengupta reports in Wednesday�s New York Times, the company is nudging them to share a bit more: credit card numbers and offline addresses.

The nudge comes from a new Facebook service called Gifts. It allows Facebook users � only in the United States for now � to buy presents for their friends on the social network. On offer are items as varied as spices from Dean & DeLuca, pajamas from BabyGap and subscriptions to Hulu Plus, the video service. This week Facebook added iTunes gift cards.

The new Gifts service recently underwent testing and is now being rolled out to users in the US; just in time for the holiday season.�

How much they will make on this new feature, nobody knows.

Millions of apps including those from game maker Zynga Inc. operate on the platform where Facebook takes a 30% cut of revenue� which is a clue.

Merchants that have a similar arrangement with Amazon.com give it a roughly 15 percent cut of sales.

But just listen to this�

According to the NY Times:

�If it catches on, the service would give Facebook a toehold in the more than $200 billion e-commerce market. Much more important, it would let the company accumulate a new stream of valuable personal data and use it to refine targeted advertisements, its bread and butter.�

The �toehold� should be emphasized, in a world when giants the likes of Amazon have long since jumped in with both feet.

And another thing, while people are excited about Facebook catching a break through their gifts service during the holidays, most people haven�t seen this little chart�

The best is already over. That is, most holiday purchases are historically made on Black Friday�

When it comes to stocks like these, it can be fun to take advantage of its volatility. Go short on it� and go long on a company with not just a great product, but a great business model.