Facebook Inc. (Nasdaq: FB) fell to a record low after freeing up an additional 271.1 million shares, boosting by 60 percent the number available to trade and compounding concerns that have depressed the stock since the initial public offering.
Facebook declined 6.3 percent to $19.87 at the close in New York. The shares haven’t closed above the $38 IPO price since the first day of trading.
The prospect of more stock sales means Facebook will need to work even harder to convince investors that it deserves a higher price, relative to earnings, than all of its U.S.-based competitors, except for LinkedIn Corp. The shares freed up today make up only 14 percent of the 1.91 billion that will be available for sales in the coming nine months.
“Buckle your seatbelts for the next couple of months until they make it through all these shares coming unlocked,” said Tom Forte, an analyst at Telsey Advisory Group in New York.
Early Facebook investors such as DST Global Ltd., Goldman Sachs Group Inc., Elevation Partners and Accel Partners can start selling part of their holdings today, Menlo Park, California-based Facebook has said in filings. That’s after the lifting of restrictions, set with underwriters, that are designed to prevent a flood of shares immediately after an IPO.
The shares subject to today’s lock-up expiry are worth about $5.39 billion, based on todays’s closing price, and represent almost six times the average daily trading volume in Facebook stock. Today’s trading volume — 156.8 million shares – – was the third-highest since the IPO.
Declining Value
The restriction is being lifted for early investors, excluding Facebook Chief Executive Officer Mark Zuckerberg, who sold part of their holdings in the IPO. Ashley Zandy, a spokeswoman for Facebook, declined to comment.
Facebook, worth about $48 billion, has lost more than $40 billion in market value since the IPO, making it the worst performer among all large IPOs on record, according to data compiled by Bloomberg.
Additional shares are freed up at various stages in the coming months. The next comes between Oct. 15 and Nov. 13, when restraints are removed on about 243 million shares. Lock-up expires on about 1.2 billion shares on Nov. 14, and on 149.4 million shares a month later. A final round comes May 18, 2013, with 47.3 million shares becoming available.
Still, the decline has been steep enough to make some investors consider holding onto shares instead of selling as quickly as they can, said Mark Harding, an analyst at JMP Securities LLC. Shares have fallen in anticipation of the expiration of the lock-ups, he said.
Microsoft, Thiel
“It certainly wouldn’t behoove and wouldn’t be in the shareholders’ best interest to dump the shares on the market all at once,” he said. “I would assume that all of the investors that hold the 270 million-odd shares are probably rational, and probably realize that flooding the market with that kind of supply over such a short amount of time wouldn’t help their position.”
Microsoft Corp., based in Redmond, Washington, will probably hang onto its stake after the lockup-ban lifts, a person with knowledge of the matter said on Aug. 10.
Microsoft views Facebook as a strategic partner in the combat against Google Inc., rather than as a near-term moneymaker, said the person, who requested anonymity because the plans are private.
Other investors have been preparing for potential sales. Director Peter Thiel, who sold in the IPO, has given himself added flexibility to unload more holdings, according to a regulatory filing. Thiel, one of Facebook’s earliest investors, converted more than 9 million shares to Class A from Class B. Class A shares are easier to sell on the public markets.
Growing Optimism
Facebook has grappled with concerns about its valuation after reporting sales growth of 32 percent in the second quarter from the year-ago period, down from 45 percent in the first quarter and 55 percent in the fourth quarter. The second-quarter gain was dwarfed by a surge in spending on marketing and sales, which ballooned to $392 million.
Part of Facebook’s challenge is making money from the growing slice of users who access the social network over mobile devices.
During the second quarter, the number of ads delivered in the U.S. dropped 2 percent from a year earlier even amid an increase in overall daily users.
Mobile advertising probably contributed just $15 million to second-quarter sales that totaled $1.18 billion, Forte said.
The company has since added a service for software developers, enabling them to entice users to download applications onto mobile devices. The company also said earlier this week that it’s testing a service that lets companies put more ads on mobile phones.
“Despite revenue growth that has decelerated, we see largely organic annual growth of” 25 percent or more through 2014, S&P Capital IQ wrote in a research note. “We have grown more optimistic about the company’s efforts related to monetization and mobile.”