Just when it looked as if Facebook shares might finally have found their footing, an event looms that could put the stock back flat on its face.
On Monday, current and former employees of the No. 1 social-networking company will be able to sell their shares for the first time. It's only the second time since Facebook's May initial public offering that lock-ups, which bar certain investors from selling their shares, have been lifted.
But unlike the previous lock-up expiration in August, which let early investors and venture capitalists sell, this is the first that lets employees cash in. And this has the potential to flood the market with shares just as buyers had been starting to show interest in the stock again.
And, most important, it will be the first time Wall Street gets to see how much Facebook employees "like" their company's stock.
Overnight, employees could uncork a surge of supply of Facebook shares on the market -- more than 230 million shares. That's roughly 11% of the company's 2.1 billion shares outstanding.
But wait -- there's more. This lock-up expiration comes just weeks before an even bigger potential onslaught. The unlock-up, if you will, that Wall Street is really bracing for is on Nov. 14, when 777 million shares are eligible for sale.
So in a roughly two-week period, new shares equal to almost half of Facebook's current shares outstanding become available for sale.
This happens at a time when beleaguered Facebook investors, to put it lightly, could really use a break. In less than six months as a public company, Facebook's storyline has been one misstep after another.
Bad news, then good news
Its much-ballyhooed May IPO turned out to be a disaster. Its plan for making money in the booming mobile market seemed nonexistent. Some of its biggest early investors dumped their shares. And its first earnings report as a public company, the second-quarter results, was a big disappointment. Pessimism was so pervasive that in early September the stock fell below $18.
This week, Facebook finally handed investors some good news when its third-quarter results beat expectations and showed it is making headway in the mobile market, boosting the stock nearly 20% in a single day.
That was small relief considering the drubbing Facebook has taken. The shares are still down more than 40% from the $38 IPO, so the additional supply that could flood the market is just about the worst thing for Facebook stock. "You have close to 1 billion shares coming through Nov. 15," says Malcolm Fobes, portfolio manager at the Berkshire Focus fund, which had a small position in Facebook as of the end of June. "I don't know if you want to be in ahead of that."
Are employees confident?
Lock-up expiration periods are pretty routine with IPOs. They're designed to protect initial investors to a limited degree, providing some assurance that employees and others won't pile on and sell immediately after a company goes public.
But the Facebook lock-up expirations are grabbing more attention than most because the IPO created such furor and then controversy. All the hype over social networking was concentrated in just a few stocks, with Facebook being the granddaddy of them all.
Wall Street is keenly watching because this will be the first indication of how loyal, satisfied and optimistic workers are with Facebook and its prospects. Rather than seeing their shares soar in the realization of a Silicon Valley dream, workers instead have watched as their company's stock has taken a beating. Until now, they had to sit on the sidelines. Starting Monday, if they think the company's future is still promising, they can hold onto shares. If not, they can sell.
