Three months after Facebook’s troubled launch as a publicly traded company, its stock this week faces yet another challenge that recently has hurt the values of other top social media companies, such as Angie’s List, Groupon and Zynga.
Facebook investors are bracing for a big hit Thursday, when the first wave of its so-called “lockup period” expires and company insiders and early investors can cash in on their shares in the open market. The prospect of millions more shares flooding the market could add downward pressure to a stock that already has lost nearly half of its value since going public May 18.
The social media giant’s stock has fallen about 45 percent below its initial public offering (IPO) price of $38, but with the possibility of another 268.1 million shares set to hit the market, the price could drop well below the $20 mark where it is hovering now, analysts warn. Given its massive presence on the Web, Facebook’s attempt to cash in on its Internet success is seen widely as a template for other top brands in the digital age.
This is just the first of a wave of potential new Facebook insider shares flooding the market. During the rest of the year, about 1.91 billion shares can be made available to the public — nearly four times as many as the nearly 500 million that currently are trading on the Nasdaq market. Facebook CEO and founder Mark Zuckerberg is one of the few owners who still will be “locked up” until later in the year.
Smaller slices of pie
“The price of Facebook will go down further,” said Paul McWilliams, editor at Next Inning Technology Research, who predicts that it could be trading in the mid- to high teens within a month. “Now we’re going to have more people who want to get out of the stock. So I see more selling pressure and more reason not to own Facebook.”
Mr. McWilliams said he expects to see many of these “lockup” owners, including venture capitalists and top employees, selling their shares in the next few months.
The smaller number of shares available helped keep the initial price high. But when the lockup ends, many early investors sell their shares and cash out, which increases the supply of the stock and lowers the price.
Kelley Damiani, vice president of Trippon Financial Research in Houston, agreed that Facebook’s stock could fall as low as $15 by the end of the year as this and other lockups expire, but she said she expects the stock to rebound starting next year and settle at a price of about $25.
She said the lockup expiration will push down the price in the short term because many regular investors who are afraid of the market flooding with more shares will panic and sell before that happens, but she doesn’t expect many of the “locked up” investors to pull the trigger at this point.
“I think Facebook is definitely getting closer to its true value,” she said. “But I would let the sell-off period elapse before buying.”
Facebook has faced a rough reception since going public. The IPO was plagued by delays and computer glitches that hindered traders on the first day. Since then, the company has faced doubts about its growth potential and revenue prospects with a so-so earnings report.
The next Facebook shares will be sold as many social media companies are struggling in the marketplace.
Investors are raising concerns about the sustainability of social media companies, and many fear they are overvalued at current prices.
Social media storm clouds
Groupon, the daily deal site, is trading below $6, the lowest level in company history, after a disappointing earnings report this week. Investors are concerned that the company will have trouble expanding its customer base.
Zynga, the social gaming company, is trading just below $3 after opening at $11 in December. Investors fear Internet users have moved past online gaming.
The lockup expirations have only made things worse for most social media companies, putting a cloud over share prices as investors try to gauge the impact of the stocks currently in public hands.
Angie’s List fell nearly 16 percent to $11.17 on Tuesday, when its lockup period ended. The company, which began trading in November, was worth just shy of $20 per share at one point.
Groupon also suffered a decline at the end of its lockup period on June 1. It opened that day at $9.72, down from a high of $14.93 on May 15, nearly a 35 percent decline in just two weeks. The stock has since fallen below $6.
When Zynga’s lockup period expired and insiders could start selling on May 29, it opened at $6.41 per share, down from $9.54 in late April, a 33 percent decline. The stock has continued to drop and is trading at about $3.
Even LinkedIn, which is regarded widely as one of the most successful technology stocks in recent memory, took a lockup hit about the time insiders could start trading in November. Toward the end of October, about a month before the lockup ended, shares were trading as high as $95. But the price dropped as low as $55.98 in the days after the expiration, a decline of more than 40 percent.
LinkedIn’s stock, however, has rebounded since then and trades at more than $100 per share.