Insider selling after the three- and six-month lockup expirations could depress the shares
While it’s not practical for me to respond to every email asking about a specific stock, I’ve been carpet-bombed by folks looking for my take on Facebook (NASDAQ:FB) in the days following its horrific IPO.
So here it is, in one sentence: Don’t touch Facebook stock for six months.
Why? There’s too much potential for insider selling after the first lockup expiration in three months and the second lockup expiration in six months, and that could depress the shares even if you’re bullish long-term on the stock.
Those dips could be buying opportunities if you’re looking to take a position, but frankly, we need some real earnings reports to see just how strong Facebook’s long-term potential is — two quarterly filings at a minimum.
Here are the details:
Lock-Up Dates
When a stock goes public, company insiders are often contractually obligated to hold their shares for a minimum period of time — usually 90 to 180 days — to prevent the market from being flooded with stock from a bunch of employees looking to get paid ASAP. A “lock-up,” in theory, allows the stock to hit an equilibrium before insiders cash in.
Considering how FB has performed so far, it’s clear that a lot of early investors haven’t been eager to stick around. Sellers have overwhelmed buyers, forcing the stock down more than 15% from its IPO price of $38 a share.
So you can imagine the selling pressure if insiders didn’t have to hold onto their Facebook stock.
The first opportunity for certain insiders to sell will be on Aug. 19. And in the 90 days after that, more than 1.7 billion shares owned by insiders will become eligible for trading. Considering that Facebook floated 421 million shares in its IPO, that’s the equivalent of four Facebook stock offerings.
Given how tepid investor sentiment was after the IPO, it’s natural to think this flood of shares is going to have trouble connecting with enough buyers.
Fundamentals
For any company that goes public, there aren’t enough quarterly filings to plot a trend. Sure, there are estimates and numbers revealed during the road show that pitch growth trajectories and forecasts. But they’re based on a very small sample.
That’s already enough of a hurdle to overcome without the scandal surrounding Facebook’s earnings estimates at the time of the IPO. Analysts at all three underwriters cut their forecasts during the road show and only selectively disclosed that information to certain clients but not to the public.
In short, we don’t have any concrete earnings reports — and all of the estimates are very suspect after this incident. I’m not the kind of investor who’s willing to take a leap of faith on revenue growth under these circumstances.
The trouble with Facebook’s murkiness is only amplified when you consider that by Facebook’s own admissions, it suffered its first quarter-to-quarter revenue decline in years from Q4 2011 to Q1 of 2012.
That’s why I say don’t jump on Facebook stock. Wait until we have some real numbers, and then invest accordingly.
What About the Future?
This isn’t to say Facebook isn’t a steal at $32. It could very well prove to be the buy of a lifetime. But it’s not just a question of overcoming insider selling and showing that Facebook has staying power via a few earnings reports. As MySpace showed, innovation can happen in a hurry, and today’s hot website can be tomorrow’s punchline.
How is Facebook going to monetize mobile, both in its current incarnation and in whatever forms the next five years produce? Who’s to say some other company won’t figure out how to do it better at some point? What if teenagers and twentysomethings start to see Facebook as the clunky platform of their parents and don’t want “old folks” in their playground, snooping around their pictures and comments?
These are serious questions for Facebook, and thus far I haven’t heard any satisfactory answers.
If I hear some good things and see some strong numbers between now and November, I may consider a position just in time for the “Santa Claus rally” around Thanksgiving.
But before then? I’m more comfortable sitting this one out.
What do you think? Is Facebook stock a bargain or are you unconvinced? Comment below or drop me a line at editor@investorplace.com.
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