Facebook Sends the Lockup Expiration Bears Packing

IPO lockup expirations just ain't what they used to be. Back in my day, a bottle of soda cost just $0.15, we used to have to ride our horses to work through six feet of snow, and freshly public companies facing a lockup expiration were destined to tank.

Nowadays, that last bit of formerly accepted wisdom doesn't quite pan out as reliably as it used to. In August, Yelp (NYSE: YELP  ) shares skyrocketed by 25% the day its lockup restrictions on insiders expired. That made me feel rather silly since I figured shares would tank once early investors were permitted to flood the market.

Well, the same storyline played out today for Facebook (NASDAQ: FB  ) , with shares jumping by as much as 11% on its own IPO lockup expiration. Is the lockup expiration sell-off a thing of the past?

Not last or least
The captain has turned off the "fasten seatbelt" sign. We're talking about a total of 804 million shares that are now permitted to roam around the cabin freely. This is by far the biggest block of shares related to the IPO that are being unshackled, so most were expecting some selling pressure. That nearly doubles the amount of shares floating around out there, which was approximately 921 million before today.

Just because insiders can sell doesn't mean they have to, and the lack of selling pressure today implies they think shares are too cheap. That's a positive side for us outsider investors who aren't privy to as much detail to Facebook's inner workings.

This lockup is the biggest but it's also not the last. There are two more lockup expirations on the horizon, so investors still have a couple of dates to circle on their Facebook event calendar. The next one is on Dec. 14 for roughly 155.9 million shares held by selling stockholders from the IPO (excluding Mark Zuckerberg).

Source: Author's Facebook. Emphasis added.

After that, another expiration is coming on May 18 on Facebook's one-year anniversary as a public company. On that day, 47.3 million shares held by Group Limited and DST Global Limited will be freed.

Still, with the largest block of shares having now been freed, subsequent smaller lockup expirations will have less impact.

Main squeeze
It's also quite possible that some of today's rally is driven by a short squeeze, where bears scramble to cover their short positions and add buying pressure. Short interest has been steadily rising since Facebook's high-profile fall from grace as bearish sentiment has accumulated in its six months as a public company.

Short interest ticked down in September as shares traded near lows, but then moved higher by the end of October, possibly in expectation of shares tanking following the highly publicized November lockup expiration.

Source: Nasdaq.

As of the Oct. 31 settlement date, there were nearly 88 million shares being held short, almost 10% of the aforementioned float. With early insiders and employees standing pat, the bulls are gathering strength as the bears run for the hills.

Bad for Zynga, good for Facebook
Incidentally, news also broke yesterday that Zynga (NASDAQ: ZNGA  ) was losing its CFO David Wehner to join Facebook in a senior finance position. Zynga's executive exodus continues to get worse before it gets better, with Wehner being but the latest in a long string of C-suite exits. Zynga reshuffled some other execs, with David Ko becoming COO and Barry Cottle becoming chief revenue officer.

This is meaningful for Facebook, as Zynga is the largest contributor to the social network's burgeoning payments platform. Scoring Zynga's CFO may help it gain a deeper understanding of its payments business.

They don't make 'em like they used to
The rally after today's lockup expiration is in stark contrast to how Facebook performed on a separate lockup expiration three months ago. In August, roughly 271 million shares -- almost a third of today's batch -- became eligible for sale, sending shares down by over 6%.

Turns out investors should have listened to fellow Fool Rick Munarriz, who told you to buy Facebook yesterday. Facebook continues to hold its own against heavyweight ad rival Google (NASDAQ: GOOGL  ) , offering advertisers a social value proposition. It's even working on a search product as we speak, further ruffling Big G's feathers. Facebook also unveiled its new social job board, which has immense revenue potential and is giving the bulls even more to feast on today.

Lockup expiration sell-offs may not quite be a thing of the past, but investors can't bet on them like they used to.

After the world's most hyped IPO turned out to be a dunce, most investors probably don't even want to think about shares of Facebook. But there are things every investor needs to know about this company. We've outlined them in our newest premium research report. There's a lot more to Facebook than meets the eye, so read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 14, 2012, at 5:12 PM, jargonific wrote:

    We sold shares that were bought very high back at the IPO day. Did it as we felt that today's lift was artificially induced.

    Time will tell if we were right. In fact if FB does what we think it will, tomorrow into Friday may be more bearish.

    The trend is that investors have been conditioned to think two things: 1) FB shares will go down again to a very low point and 2) they will then rise to IPO level or above.

    That's happened over time with many different writers and sources, but more than anything, its happened because of the usage staying relatively same, and ad growth growing somewhat.

    The true believer remains true, especially when that true believer is captain of a short selling team whose members buy/sell shares with supercomputers at IPO, Earnings, or Buy Out times. Yes, they probably picked up a lot of shares and will now make a killing having both brought the share price up to an optioned locale on the ticker and at the same time catalyzed a sell off to follow that will once again stimulate a buy back in at an even lower share price than $17.50.

    I just retired from the trained seal committee that has been standing by watching this circus. Nice to breath the air again without worry about losses, above what we already had. And maybe one day if we stay in the market at all, big maybe, we will once again buy FB. That is if there is a buy in point that we feel has some potential to help us recover our losses.

    Facebook, what about setting up another site for bummed out traders like Lossbook? I'll be your first customer.

  • Report this Comment On November 14, 2012, at 6:52 PM, jm7700229 wrote:

    BFD. The high after the lockup was less than the high 3 weeks ago.

  • Report this Comment On November 14, 2012, at 10:01 PM, snapperreef wrote:

    And this on a day when the Dow tanks 185 pts??

  • Report this Comment On November 15, 2012, at 7:55 AM, jargonific wrote:

    Re "this on a day when the Dow tanks".. it's worse than we think! Or are we to believe that FB shares suddenly got valuable, whereas other companies lost their value suddenly? Companies like Apple, down to the 530's, but FB rises on an end of lock out day? Doesn't it make you think about the magician's trick trade system using shorts, options, and manipulations?

    Ssssssh, don't tell anybody. Oh go ahead tell everybody... OK tell Cramer the up is down, the hush story just became the please disseminate widely story... "Facebook, now a buy?" These people are laughing at us as they steal our $.

    They trick people so often. Just beware please. You can join the maddening crowd on FB, but do it on a dip, not a falsified bump.

  • Report this Comment On November 15, 2012, at 8:01 AM, jargonific wrote:

    Sorry to double post, but companies are using all means to get positive media as global stock values tank. Protect yourselves.

    Recession announced in Europe. BBC gives Netanyahu in Israel a megaphone to announce he considers ground war into Gaza. Fragile economies and "economic austerity" as the lending world calls what they did to citizens from Spain to Greece and Germany... sent people into the streets in many countries yesterday. --This is the stuff that sends markets into major turmoil.

    Protect your assets. Give consideration to getting liquid into cash where possible. It's for real. They could well go to cliff, or at least see major corporate world push political window of opportunity to point that American people might go flying out that window.

    Didn't think it would come to this. I underestimated the greed of the new age US corporateers.

  • Report this Comment On November 15, 2012, at 11:09 AM, 48ozhalfgallons wrote:

    Jargonific: Go ahead and double post; nothing wrong with reading common sense twice.

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