If you thought Facebook’s stock is cheap now (it is down quite a bit from its $38 IPO price), you might want to wait a little longer because, if the stock follows the standard pattern of IPO issues, it might be in for another round of price erosion. The culprit? The expiration of the lock period when company founders, company investors, and institutional backers are legally prohibited from selling their shares. The end of the lock period means there might be a flood of insider shares hitting the market. Given the current softness of global equities markets due to the Greek and Spanish financial ordeals, the sudden flood of insider shares on the market might make for quite a steep fall in the price of Facebook stock. Add to this the lingering skepticism about the company’s ability to monetize its increasingly huge mobile user base and its slowing growth rate, and you might just have a heavily discounted stock in your hands.
Lock-up expirations typically, on average, depress a stock’s price by 2%. It is all a question of supply and demand. High stock prices will fall if the supply for that particular equity spikes up due to the expiration of lock up periods. Moreover, the fact that insiders, executives, and early investors are selling sends a message to the overall market regarding the company’s prospects. This all adds up to downward spiral that can only be effectively beaten back by solid corporate performance.
Just how much Facebook stock will sweep the market? It is huge. By some estimates 1.7 billion (yes, that’s a B not an M) will hit the market. Considering the stock has hemorrhaged when only 268 million shares are floating, you can only imagine what will happen to the company’s stock price when 1.7 billion more shares hit the market. Of course, many insiders will hang on to some of their stock holdings. However, it is not certain how much will be held on to and how many will be cashed in. Another factor compounding a possible free fall in stock price is the fact that most holders of Facebook stock are individuals. Professional investment companies and institutions factor in lock in period expirations to their stock acquisition plans. Given that mostly individuals hold Facebook stock, it would not be surprising to see many of these get spooked by the downward pressure of insider and early investor selling once the lock up period expires.