If You Think Things are Bad for Facebook, Wait until August 16
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When asked why a particular stock had fallen, one of the founding partners at the brokerage house where my father used to work, would always reply, "More sellers than buyers." Beginning August 16 and until the end of the year, this will likely be heard more and more about the stock performance of Facebook (NASDAQ: FB)
At that time, "lock-up" agreements for the first expiration group of Facebook shares, 268 million shares total, will expire. That is just the initial block of shares being released for sale in mid-August as those who were previously barred from selling their shares can now do so. This happens as employees and major investors are required by law to hold shares for at least 90 days after an initial public offering. There could be, literally, hundred of millions of more shares of Facebook for sale as a result beginning on August 16. While this was instituted to prevent insiders and employees from cashing in early and exerting downward pressure on the share price, this will certainly not be the case with Facebook as the stock is barely above half the initial public offering price of $38.
Overall, nearly 1.7 billion more shares of Facebook stock will enter the stock market over the next few months. 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," observed Francis Gaskins, president of research firm IPOdesktop.com.
As Facebook is down over 30% for the last month of market action, that is already happening.
Having 268 million shares on the supply side will certainly lower the price offered by the demand forces. After the initial tranche in mid-August, there will be 192 million more shares available for sale in mid-October. In November, the flood gates will be fully open as 1.2 billion more shares will enter the buying and selling activities of the stock market. Facebook should report third quarter earnings in late October, so it could be a very bloody autumn.
For those who think that the insiders will not sell, just look at those leaving Facebook. Senior executives Katie Mitic and Ethan Bearn recently announced their departures. Mitic was the former director of platform marketing and Beard was head of platform partnerships. In June, Bret Taylor, the former Chief Technology Officer for Facebook, announced that he was leaving.
Those staying at Facebook or owning shares that can be sold starting in mid-August could sell for a myriad of factors, ranging from diversifying their portfolios to needing money to pay tuition for a child for the fall semester. The recent stock performance at Facebook will make it that much easier to justify the sales. No matter the reason, that selling will still drive the share price lower.
Former Facebook bulls such as Mark Cuban, the owner of the Dallas Mavericks, have sold their shares at a loss. Marc Cuban wrote in his blog a piece entitled, "Is Facebook the new internet and how soon before Microsfot Tries to Buy it" on April 22, 2010. Cuban, who made billions from the internet, concluded with, "Time will tell, but there is no question that Facebook is quickly becoming the biggest threat to the futures of Apple and Google."
In June of this year, Mark Cuban sold his Facebook shares at a loss, stating, "“I took my hit, my thesis was wrong. I thought we’d get a quick bounce just with some excitement about the stock. I was wrong, and when you’re wrong you don’t wait, you just get out. I took a beating and left.”
As for being "the biggest threat to the futures of Apple and Google," both have moved forward from their initial public offerings much more forcefully than Facebook. While the earnings for the first quarter after its initial public offering took the share price of Facebook down by 12%, Google (NASDAQ: GOOG) stock rose by 15% when it reported in the third quarter of 2004. Apple (NASDAQ: AAPL), now trading around $615 a share, went public on December 12, 1980 at $2.75 a share, based on adjustments for the three splits.
When Facebook went public, there was an assumption of a valuation for the company of $100 billion. For that, Facebook will need to trade at 33 times advertising revenues. Google, now trading around $640 a share with a market cap about $210 billioin, is based on 5.5 times its advertising revenues. Apple, valued around $575 billion market cap, currently trades around 3.8 times sales. Utilizing this metric, Facebook would be at valued at $15 billion, or about $7 a share.
Rather than comparing Facebook to Apple and Google, the performance of other social media stocks such as Zynga (NASDAQ: ZNGA) and Groupon (NASDAQ: GRPN) since the initial public offering are more instructive. Like Facebook, neither Groupon nor Zynga has any formidable barriers-to-entry or daunting economic moat. Both depend on advertising revenue, too. Now trading around $3 a share, Zynga is off more than 70% from its $10 initial public offering price in December. Groupon, which went public at $20 a share last November, is more than 65% below that at around $7.
In what will likely prove to be an understatement, Michael Pachter of Wedbush Securities predicted: "I think Facebook is going to be a mess until the lock-ups are done. Nobody trusts their shareholders, the insiders, the VCs and the way they behaved in the IPO-greedily." Added Josef Schuster, founder of IPOX Schuster, a research firm for initial public offerings, "Buying Facebook now is like trying to catch a falling knife. You don't want to have a piece of it."
That is certainly evinced by the 13.46% short float (a 5% short float is considered to be disturbing for a company). Also alarming for Facebook shareholoders is that there has not been any public support from the analyst community or the 33 underwriters of Facebook's initial public offering after the recent earnings report that sent the share price plunging. The law of supply and demand works for all assets, including Facebook stock. With around 1.7 billion more shares about to flood the market it appears as it the price of Facebook will continue to sink.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Google. Motley Fool newsletter services recommend Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.