Written by John Lounsbury
The ballyhooed Facebook IPO (NASDAQ:FB) earlier this year closed trading yesterday (August 16) at $19.87. It hit an intraday low of $19.69. After the initial offering on May 18, priced at $38, FB traded as high as $45 but the shares closed the day almost flat at $38.23. A colossal trading systems screw up kept traders in the dark for up to 90 minutes after the opening about whether their trades had cleared. This was an unprecedented failure of market operations and the price quickly started falling, partly because of investor uncertainty because of lack of communication about order clearing. Some analysts said that the price was falling because the IPO was grossly over priced.
Follow up:The closing price was maintained above $38 on the first day of trading only because of a massive infusion of buy orders from the IPO underwriters. Two days later the shares closed at $31. Twelve days later FB traded as low as $25.52. But then things started to look up and for a couple days near the end of June FB saw intraday highs above $33.
With the close below $20 today (August 16) the decline within three months of the IPO has exceeded 47% from the IPO price ($38) and and has reached just short of 56% from the first day intraday high ($45).
The reason for the decline by more than 6% on August 16 was because of the expiration this week of the insider lock-up period for 271 million shares of restricted the stock. Restricted stock is comprised of shares held by insiders such as early venture capital investors and company employees. This makes 271 million additional FB shares available to the market and has two potential effects:
1. The price could be further depressed if a significant number of these new shares are offered for sale.
2. The price could be pushed higher if the significantly greater number of shares eligible for hypothecation allow short interest to rise significantly (more shares available to borrow for shorting) and the insiders (and others) do not offer shares for sale.
The bets on August 16 appeared to favor the first possibility. But the second possibility could come to the fore in the coming days. The volume of trading on August 16 (157.6 million shares) was more than 3.4x the average daily trading volume. If a significant portion of this increased number were short sales rather than normal sales, and if the newly released shares are not offered in appreciable numbers in the next few days, it would not take much buying to create a major short squeeze. In that case FB could see a quick price spike back into the mid 20's where it was trading just over two weeks ago at the end of July.
The outcome of the current restricted stock is just the first chapter of what is to come. Many more restricted shares will be released in the coming months:
- 243 million shares between October 23 and November 13
- 1.2 billion shares on November 14
- 149 million shares on December 14
- 47 million in May 2013
So the August 16 exercise in restriction removal represents only about 14% of all the restricted stock that will be available to the market within months. The market outcome of the current absorption process for release of restricted shares is unlikely to provide an exact template for what will happen in the future, especially in October when the shares will be coming primarily from Facebook employees and in November when the release will be nearly 4x thesize of the one on August 16.
There are analysts who have maintained since before the IPO date that Facebook was overvalued in the 30s and the real value of the stock was below $20. Two of those with the lowest valuations wrote articles about them for GEI Investing. Andrew Butter valued the stock at $11 (a week before the IPO date) and Keith Fitz-Gerald said $7.50 a week after the IPO when the stock was trading in the low 30s.
Andrew Butter said on May 9 that he would be a buyer of Facebook at $5. That doesn't seem an impossible target today (as it did in the heady hype of May 9), but if that price were achieved the stock would be quite a bargain with the numbers available today. The PEG for FB (that's the price/earnings ratio devided by the forward estimated earnings growth) would be about 0.7 If earnings growth estimates were cut to the 20% a year (from the current 27%) the PEG would be 1.0, which is often considered an attractive ratio for a purchase.
I think I would join Andrew as a buyer of FB at $5. In the meantime it sure looks like a better trading stock than an investment.
Facebook is No. 2: Worth $30 Billion (NOT $100 B) by Andrew Butter
Facebook Moves toward Analyst Average, But is That the Right Price? by Andrew Butter
Facebook: Top Valuation Should be $7.50 by Keith Fitz-Gerald
Social Media Stocks: Reversal of Fortunes by De Gill
What Really Happened with Facebook's IPO by John Lounsbury (at Investing Daily)