This morning a full 271 million Facebook shares became tradable, increasing the pool of liquid stock by roughly 60 percent. That increase has investors fretting about the possibility of a great flood, and in case there weren’t enough religious overtones to that chatter, Facebook faithful are also being encouraged to buy shares if infidels dump the stock.
Anxiety is palpable over today’s lock-up expiration, which frees people who sold during Facebook’s initial public offering to sell still more stock. The social network’s shares are already down 44 percent since the IPO and 25 percent over the past month alone, indicating there’s hardly enough demand to absorb a huge wave of sell orders should newly liberated shareholders decide to seek buyers. In addition to today’s lock-up expiration, huge numbers of Facebook shares will come on the market in October, November, December, and May.
Investors are also worried about a multi-billion-dollar tax bill hitting Facebook this fall and about employees jumping ship as the depressed stock price leaves many of them underwater.
Naysayers see no end to the gloom. Evercore partners’ Ken Sena issued a note to clients saying Facebook’s stock weakness “is likely to be drawn out" and advised CNBC viewers to avoid Facebook shares until all its lock-up dates have passed, which won’t happen until May 2013.
True believers, meanwhile, say investors should not let their faith waver.
Take Sanford Bernstein's Carlos Kirjner. He’s no fool for Facebook; the sell-side analyst set a pessimistic (and prophetic) price target of $25 for FB back when other analysts predicted the stock would trade above $30 or $40 (it's now at $21). But he believes in Facebook’s underlying value and is telling investors to look at the expiration of stock lockups as a possible buying opportunity.
“The impact of the increase in float due to the lock up expiration tomorrow and in the next few months is not a reflection of the fundamentals of the business and will likely be fleeting,” Kirjner says. “We have a market perform rating on Facebook. However, if the abrupt growth in liquidity tomorrow (or in November when the float increases by 1.3 billion shares) leads to a significant drop in the stock price, e.g., into the teens, we would see it as a potentially attractive buying opportunity."
S&P analyst Scott Kessler, meanwhile, upgraded Facebook this week and urged investors to look to the Facebook priesthood during these trying times. “We do not expect early employees and investors will be aggressive sellers of FB shares at current levels,” he wrote in a widely circulated note about the lockup expiration.
The adherents have a point. Facebook’s stock is weak, but as a company it’s strong, having posted $1 billion in profit last year on $3.7 billion in revenue. If the social network can avoid getting distracted and dragged down by how Wall Street values its shares it should grow both income and its stock price impressively over the long term. But as Facebook is learning the hard way this summer, such distraction is a tricky thing to avoid.
