Facebook Inc. shares sank 6.3 per cent to a record closing low after early investors got the green light to sell for the first time since the No. 1 social network went public, starting a string of insider lock-up expirations that will pressure the stock for months.
More than 270 million shares owned by early investors became available for trade on Thursday after a three-month curb on sales ended. That’s more than half the 421 million shares sold in its initial public offering on May 18.
The company founded by Mark Zuckerberg in his Harvard dorm room became the only US company to debut with a market value of more than $100 billion.
But investors have since grown disillusioned with Facebook’s inability to articulate a plan to reverse slowing revenue growth – due in large part to its limited mobile advertising efforts – sending the stock down almost 50 per cent from its $38 debut.
Many investors remain unnerved by the massive flood of shares still waiting to be released. More than 1.4 billion additional shares will be eligible for selling by year’s end, nearly tripling the amount available for trade.
Analysts say the frenetic trading offers a taste of what may transpire in November, when many of the social network’s employees get to cash in stock awards for the first time.
“An incredible amount, all the shares coming,” said Steve Birenberg, president of Northlake Capital Management and portfolio manager for Entermedia Growth Partners, a hedge fund.
“It’s important because it adds to the negative sentiment. Here you are with a big overhang of stock, you’ve got decelerating growth ... everything out there now is sort of spun negatively.”
With Thursday’s sell-off, Facebook has lost almost $50 billion, or just under half, of its value since its IPO. The stock, which debuted at $38, fell as much as 7.1 per cent to an all-time low of $19.69 before ending the day at $19.87.
Facebook has been wildly volatile, moving more than three per cent in most sessions. It was the most active counter on the Nasdaq on Thursday with roughly 157 million shares changing hands – five times its 50-day daily average of just under 30 million shares.
Analysts said it wasn’t clear whether the sell-off was actually driven by insiders or by other shareholders worried about potential insider selling.
“I don’t think you’re going to see all the supply come to market on Day One. People will wait until they think there will be a little bit of a price lift,” said Evercore Partners analyst Ken Sena. “You could say some of the concerns got priced in, and now it’s a question of how much demand is there to absorb the increased supply.”
Facebook’s IPO was to have been the expected culmination of years of breakneck growth that established it as the world’s largest internet social network with a billion users, challenging Google Inc. for consumers’ time and advertising dollars.
Its May coming-out party is often compared with Google’s, which also debuted against a backdrop of intense investor enthusiasm. But the search company founded by Larry Page and Sergey Brin fared better after its IPO, gaining more than 70 per cent in its first 60 days on the market.
After staging one of the most highly anticipated IPOs in history, Facebook has felt the sting of disenchantment on investors’ part.
Concerns about the company’s slowing revenue growth, and its ability to make money on mobile advertising, have pressured the stock. With Facebook trading at just under $20, Zuckerberg, 28, who enjoys majority voting power, has now watched more than $9 billion evaporate from his net worth. He was ranked 35th on the latest Forbes list of the world’s richest billionaires, published in September 2011.
“You’ve had a failed IPO, the stock has been cut in half, a sloppy quarter and a big lock-up expiring. Every one of those tends to erode faith,” said Michael Binger, a portfolio manager at Gradient Investments, whose firm does not have a position in Facebook.
With Facebook still trading at 40 times its expected 2012 earnings, compared to 16 for Google and 14 for Apple Inc, Binger said he did not see a buying opportunity until the company’s revenue growth starts to accelerate again.
Another amount of 243 million shares will be released from lock-up between mid-October and mid-November. On November 14, more than 1.2 billion shares will be available for trading. Zuckerberg will not be able to sell his shares until then.
“The biggest issue is not this lock-up; it’s the November lock-up,” said Pivotal Research Group analyst Brian Wieser. If the company’s perceived operating momentum does not improve by then, he said, “then there’s real trouble right ahead.”
As the insider lock-ups started to expire, the number of Facebook shares shorted hit a new high of 92.6 million shares on Thursday, roughly 13 per cent of the company’s float of 692 million shares.