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It's difficult to think that an additional 852 million shares of Facebook stock hitting the market wouldn't weigh on the already struggling share price.
That's why, for the third time in nearly as many months, Facebook Inc. (Nasdaq: FB) on Wednesday braced for what could have been the largest selling spree yet to hit the social networking giant.
Scores of early investors and employees were at liberty to sell 778 million shares. Another 31 million in restricted stock, awarded to employees who joined the Menlo Park, CA-based company prior to 2011, were also unbound, along with 48 million shares held by former employees.
The staggering number is almost equal to Facebook's existing 921 million share float, according to data from the company's most current filing with the U.S. Securities and Exchange Commission.
But, a strange thing happened.
Instead of falling amid the torrent of new shares, Facebook's stock rose Wednesday.
Right after the opening bell on Wall Street and for the first half hour of trading, the stock enjoyed a 10% rally. By 2 p.m., it was up nearly 12% at $22.22.
Why? Morningstar analyst Rick Summer says the result could have been that investors were planning to buy today after the price tumbled, and piled into the stock anyway.
"Certainly there was a delay and pent up demand in shares," Summer told ABC News.
Facebook Stock Surviving Lockup Expiration
The unexpected, yet very welcomed gains were surprising on several fronts.
Following the first two lock up expirations, Facebook stock suffered steep losses. Plus, IPOs typically tend to tumble 2% after lockups expire, Jay Ritter, professor of finance at the University of Florida explained to USA Today.
But, recent institutional and mutual fund buying after the company's better-than-expected earnings report last month, which showed the world's social network leader is making headways in the mobile arena and booking revenue, no doubt provided a cushion for the stock Wednesday amid the colossal influx of shares.
Also providing a floor to the share price is CEO Mark Zuckerberg's loyal pledge to hold his massive stash of Facebook stock (in excess of 500 million shares) for at least a year.
Bracing for a Post-Facebook Lockup Impact
Lockups usually last 90 to 180 days after an IPO, intending to provide a healthy ground for a stock's price.
But in Facebook's case, the selling came fast and furious immediately after shares hit the market on May 18 with a debut price of $38.
Since the fabled IPO, which turned out to be nothing short of a fiasco, shares have lost nearly half of their value and the company's valuation is a mere fraction of what it was at the IPO.
Wedbush analyst Michael Pachter, who has been closely covering Facebook from the start, told MarketWatch ahead of Wednesday that the lockup expiration would deliver a "massive impact" to FB. He referenced Facebook's steady share loss since its third quarter earnings report on Oct. 23, citing the "overhang" from the anticipated share float.
"It's impossible to know whether VCs (venture capitalists) and other early investors will sell, but Peter Thiel's sale of more than 80% of his stock is a sign that others may consider doing the same," Pachter continued.
Thiel, co-founder of Facebook and one of Facebook's original investors, was among the earliest insiders to cash in following the first lockup expiration in August when about 270 million shares were let loose.
Shortly after, Facebook stock sank to a record of $17.55.
The second expiration occurred Oct. 31 when a bevy of Facebook employees were afforded the first opportunity to exchange their paper profit for real cash.
Wednesday marked the third expiration, and two much smaller lockups are still to come.
On Dec 14, roughly 156 million shares will hit the market. And on May 18, 2013, FB's one-year anniversary as a public company, an addition 47 million shares of Facebook stock will be free to sell.
Related Articles and News:
- Money Morning:
Why Facebook Stock Soared After Earnings Report
- Money Morning:
Why Facebook Stock Has Much Farther to Fall
- Money Morning:
Congrats on One Billion Facebook Users…Who Buy Nothing
- CNN Money:
800 million Facebook shares set to flood market
- USA Today:
Facebook stock jumps as lockup expires
Facebook braces for biggest lockup wave