Facebook Looks Inside and Sees Nothing Good
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Aug. 16 was the end of the first lockup period for the IPO of the Millenium, Facebook (NASDAQ: FB) and the results were nothing short of spectacular, if completely expected.
On the same day that the SPDR S&P 500 ETF (NYSEMKT: SPY) broke through resistance to close at its highest price of the year on anemic volume, $141.99, Facebook broke down through round number support at $20 per share on five times normal volume to close at $19.88 per share, down 6.2% for the day.
271 million shares were freed to be sold into this bloodbath. 156 million exchanged hands on the day. How many of these were people who sold into still large profits from when they took positions in the company when they were private? Lost in a lot of the discussion about Facebook is that when the rumors started to percolate back in November about an IPO the numbers being kicked around were $10-12 per share. So, even at $21.20 on August 15th, for some of these insiders that represents a doubling of their initial investment or more.
Microsoft (NASDAQ: MSFT) was an early investor in Facebook and they made it publicly known that they would be selling a portion of the stake, roughly equal to their initial investment in the company after the IPO, this amounted to only one-quarter of their position.
What is apparent, however, is that the stock was grossly over-valued at the IPO price of $38 per share relative to the supply of stock available to be sold. Now that the company has made so many people so much money even at half that price it would make sense to see them sell into this supply further dropping the price. This supply mismatch is going to hang over Facebook’s stock until November 14th when the last large tranche of shares (1.32 billion) are opened up for sale. There’s another 249 million coming available on October 15th.
With the collapse of Zynga (NASDAQ: ZNGA) due to a lack of anything resembling growth or a plan the negativity surrounding Facebook now is reaching an acme. For those bullish on the idea of Facebook and its long-term ability to leverage its data and find a business model that can monetize it effectively times like these represent fantastic opportunities.
However, the supply overhang of so many shares potentially coming into the supply over the next three months makes that position a risky proposition at best. While you may believe in the fundamentals of the company, or at least in the potential for what it could become, the timing for taking a position in it is terrible.
This isn’t a speculative turnaround story like Nokia (NYSE: NOK) where all of the bad news is now out in the open and the company simply has to execute or go away quietly, there is still a lot of downside risk in the stock because of this. Facebook is essentially a startup company that has not yet proven that they provide a service anyone is truly willing to pay for to use. Nokia may build phones no one wants today, but it can go back and try again to build phones people do want until they run out of assets.
Facebook has yet to figure out what it is they sell, except stock.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Microsoft. Motley Fool newsletter services recommend Facebook and Nokia. 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.