Three months after Facebook's troubled launch as a publicly traded company, its troubled stock faces another challenge Thursday when millions more shares could flood the market and add downward pressure to a stock that already has lost nearly half of its initial public offering price.
The social media giant has fallen about 45 percent below its initial public offering price of $38, but with the possibility of another 268.1 million shares set to hit the market on Aug. 16, the price could drop well below the $20 mark it is hovering around now, analysts warn.
This is the first wave of shares becoming available for trading following what is known as the end of the "lockup period," when insiders and early investors who initially were prevented from selling their shares. During the rest of the year, about 1.91 billion shares can be made available to the public, which is about four times as many as the nearly 500 million that currently are trading on the NASDAQ market.
The smaller number of shares available helps keep the initial price high. But when the lockup ends, many early investors sell their shares and cash out, which increases supply of the stock and lowers the price.
"My cut of the pie goes down," explained Paul McWilliams, editor of Next Inning Technology Research.
Facebook hasn't been able to escape its problems since going public on May 18. The IPO was plagued by delays and computer glitches that hindered traders on the first day. Since then, the company has faced new doubts about its growth potential and revenue streams with a so-so earnings report.
The new Facebook shares sale comes as many social media stocks struggle. Investors are raising concerns about the sustainability of social media companies, and many fear many are overvalued at current prices.
Groupon, the daily deal site, is trading below $6, the lowest level in company history, after a disappointing earnings report this week. Investors are concerned that the company will have trouble expanding its customer base.
Zynga, the social gaming company, is trading just below $3, after opening at $11 in December. Investors are concerned that Internet users have moved past online gaming.
The lockup expirations have only made things worse for most social media companies, putting a cloud over share prices as investors try to gauge the impact of the stocks currently in public hands.
Groupon also suffered a decline at the end of its lockup period on June 1, 2012. It opened that day at $9.72, down from a high of $14.93 on May 15, nearly a 35 percent decline in just two weeks. The stock has since fallen to $7.68.
When Zynga's lockup period expired and insiders could start selling on May 29, it opened at $6.41, down from $9.54 in late April, a 33 percent decline. The stock has continued to drop and is now trading at $2.96.
Even LinkedIn, which is widely regarded as one of the most successful technology stocks in recent memory, took a "lockup" hit around the time insiders could start trading in November 2011. Toward the end of October, about a month before the lockup ended, it was trading as high as $95. But it dropped as low as $55.98 in the days following the expiration, a decline of more than 40 percent.
The LedIn stock, however, has since rebound and now trades more than $100.
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