Facebook's Stock Doesn't Fall Just Because You Think It Will

Even a Facebook (NASDAQ: FB  ) bull like me was taken by surprise with yesterday's 13% pop.

Aren't stocks supposed to go down when the clock runs out on lockup restrictions for pre-IPO shares? Facebook had 773 million shares and 31 million restricted stock units become available for sale on Wednesday. That should have been a recipe for a disaster, but it wound up being one tasty casserole.

"Some will argue that this is why Facebook is untouchable as an investment," I suggested on Tuesday. "I don't see it that way at all. All of this tension and dread make this a great buying opportunity."

See, there's no free lunch -- even for this tasty casserole.

Beware of conventional wisdom
Tech debutantes will always be susceptible to lockup expirations. It's the nature of the niche, especially when we're looking at dot-com rookies that emphasize stock options over salaries as a way to commit employees to the team sport of fishing for success.

When the right amount of time passes after an IPO, the floodgates may very well open after a very hot or very cold offering.

However, Facebook's pop yesterday isn't the first time this year that a stock has soared on the day when a material sum of shares could hit the open market. Yelp (NYSE: YELP  ) shares soared 23% this summer on the day that its employees and early investors were allowed the first crack at bailing.

There's more to that story than meets the eye, though.

For starters, shares of Yelp took a hit two weeks week earlier when fellow rookie Angie's List (NASDAQ: ANGI  ) suffered a 16% decline the day that it had its own restrictions eased for early investors. Yelp's stock wound up suffering a 17% hit that entire week.

In other words, investors were already selling ahead of the news. They knew that Yelp's lockup expiration was coming, so investors figured that they would jump out of the moving car before it went over the cliff. Well, that was the cliff.

Another part of the Yelp story that needs to be told is that the pop wasn't sustainable. The stock has surrendered 25% of its value since the unexpected surge on Aug. 29.

Where does that leave Facebook? Well, if you are trying to draw parallels of Yelp's story to what has and will happen to Facebook's stock, you missed the point. Every story is unique. Lockup restrictions are negative events. The increase in a stock's float and the potential for selling are very real. However, the notion that a stock will tank on the day those restrictions ease -- as if employees are calling in sick that day to push out sell orders -- is historically inaccurate.

The lockup restrictions are bad, but it's up to each individual company to deliver on the fundamentals that will want to make insiders and retail investors alike hold on for the long haul.

Once again, there is no free lunch. You're just going to have to buy your own casserole.

A world of opportunity
There's a new premium report on Facebook detailing the opportunities and challenges in store for its shareholders. The report includes a full year of updates, so time's ticking. Click here to check it out now.


Read/Post Comments (1) | Recommend This Article (2)

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 17, 2012, at 10:53 AM, tickerTaylor wrote:

    There is no fowl play in FB post-lockup increase. When the locked-up sellers didn't sell shares, those who shorted the stock had to scramble and purchase some stock to satisfy their position. Hence the incease. So I was told. However other than this, there is not a single positive fundamental change in the company to allow a +tive gain like this seen in the last couple of days. There is only so much room for this stock to go up on this 'satisfying of shorts' reason, otherwise FB is worth, as many analysts put it, around $6/share. With FB, I too would sell just like Peter Theil

    who sold his $1BB stake.

    Other reasons to sell:

    - P/E is very jittery

    p/e of 20-30 may be reasonable even for IPO but

    +100 is a bubble.

    - needs a very large population just to make a buck

    - fb user fad can fade any day

    People should know when they see a bubble, those that don't are usually the victims incessantly believing in better tomorrow without reason. In the last round of tech bubble, the small investors got canned, while the well connected and top executives all cashed out earlier and bought their mansions.

    Can anyone seriously argue that the story will be allowed to play out in ordinary and small investor's favor this round?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2115565, ~/Articles/ArticleHandler.aspx, 12/21/2014 7:51:48 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement