As if there weren't enough factors to make Facebook (Nasdaq: FB) stock unattractive, there's a flood of free shares about to hit the market that could make it even harder to raise the share price.
In two weeks comes the first expiration of "lock-up" agreements, meaning certain investors barred from selling their shares will then be able to do so. Typically employees and big investors are required to hold shares for a certain time period after an IPO. This is done to reduce selling pressure and the chance of a mass exodus as soon as the stock starts trading.
But now some of those investors' shares will be freed up, and they want to cash in.
Nearly 1.7 billion shares of Facebook stock will enter the market over the next few months, starting in mid-August. That is more than four times the number of shares now floating on exchanges.
"It's like a train coming around the corner toward shareholders, so they better get out of the way, Francis Gaskins, president of research firm IPOdesktop.com, told the Los Angeles Times.
The first batch of 268 million shares will be freed up in mid-August, followed by 192 million more shares in mid-October, and a whopping 1.2 billion shares will be let loose in mid-November.
Granted, a slew of those shares will not be sold, but the fresh torrent of shares to be set free far outnumbers the 421.2 million shares Facebook sold in its fabled IPO.
"Certainly many shareholders will sell to diversify," Jay Ritter, an IPO expert at the University of Florida, shared with the LA Times. "If I was an employee of the company, and I had a lot of my paper wealth in Facebook stock and I was renting an apartment even though I was a millionaire on paper, I would sell some of my stock."
Investors who were considering Facebook may very well opt to stay on the sidelines over the next few months in anticipation of the deluge of new shares. That alone could hold Facebook shares from much, or any, upward momentum.
"Buying Facebook now is like trying to catch a falling knife. You don't want to have a piece of it," Josef Schuster, founder of IPO research firm IPOX Schuster in Chicago told the LA Times.
Michael Pachter of Wedbush Securities, who has been covering Facebook from the start, said the tone set from Facebook's rocky start as a public company makes this post-lockup period even more volatile.
"I think Facebook is going to be a mess until the lock-ups are done," Pachter told the LA Times. "Nobody trusts their shareholders, the insiders, the VCs and the way they behaved in the IPO-greedily."
Facebook Stock: Third Quarter and Beyond
Since its debut on May 18, Facebook shares are down some 38%. Valued at $100 billion when it went public, Facebook's valuation has been sliced in half.
Investors that stuck around for the second-quarter earnings report released July 26 after the close didn't hear much they liked. Shares were slapped 12% lower the following Friday to close at $23.70. Intraday, shares reached a then all-time low of $22.28.
Setting off the rash of selling and sending shares reeling downward were clear signals that the social networking giant continues to struggle to tap into a profitable revenue stream from the explosive mobile arena.
"Mobile is a huge opportunity for Facebook," claimed CEO Mark Zuckerberg during the company's earnings call. "Over the next five years, we expect 4 billion or 5 billion people to have smartphones. That's more than twice as many people that have computers today."
While Facebook acknowledged the growing trend in users accessing their Facebook accounts via mobile devices, the company did not detail how it plans to capitalize on the shift.
In addition, Facebook reported its slowest revenue growth in at least a year, costs and expenses that tripled, a slight defection of some users; and waning user activity in some segments. The company was also vague on future guidance.
Notably absent in the wake of the earnings report were any upgrades from the rich roster (33) of underwriters or other industry analysts.
Facebook stock was down more than 6% by 3 p.m. today, to new all-time lows below $22 a share.
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- Los Angeles Times:
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