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The stocks in the S&P 500 (SNPINDEX: ^GSPC ) represent most of the largest and most influential companies in the U.S. economy. But as Facebook (NASDAQ: FB ) has finally soared above its IPO price after languishing in the depths for more than a year after its offering, it's looking increasingly apparent that the index will have to admit the social-media giant into its ranks sooner or later. When will the inevitable event occur that will lead to millions of index investors forcibly owning a piece of Facebook?
It has always been just a matter of time
From just about the moment Facebook announced its IPO in early 2012, it was evident that eventually, it would make its way into most of the most widely followed stock market benchmarks. Although its post-IPO slump sent its market-cap plunging through much of late 2012 and early 2013, the social giant's recent successes in beginning to penetrate the key mobile market has pulled the stock back up above its initial offering price.
Early on, the reason why Facebook didn't immediately make it into the S&P largely had to do with the index's seasoning requirements. S&P's methodology requires that newly public companies get six to 12 months of exposure to the public markets before becoming eligible to join the index. Moreover, even though the company had a more than ample market capitalization, its public float was relatively small, reflecting massive amounts of locked-up shares owned by insiders.
But since then, expirations of lock-up provisions have greatly increased Facebook's float, which now represents about 60% of total shares outstanding. That leaves more than $60 billion worth of Facebook stock available for institutional investors -- an ample supply to take care of any liquidity concerns among the index-fund and ETF investors that will own Facebook shares indirectly.
Moreover, other indexes have embraced Facebook. The Nasdaq 100, which the popular PowerShares QQQ ETF (NASDAQ: QQQ ) tracks, admitted Facebook to its ranks last December. Russell's indexes were quick to bring Facebook into the fold, and this past June, its weighting in those indexes increased greatly as Russell recognized its rising float.
When will S&P pull the trigger?
In June, S&P Dow Jones Indices analyst Howard Silverblatt told Bloomberg that the key to Facebook's inclusion would be when the broader social media industry grew enough to require representation in the index. The success of business-social specialist LinkedIn (NYSE: LNKD ) , whose stock performance has greatly exceeded Facebook's, is one factor supporting such a conclusion. LinkedIn itself could just as easily argue it deserves a place in the index, with a $28 billion market cap and a similar record of profitability to Facebook's. Another could be Twitter's recently announced IPO, which is likely to get similar levels of attention as Facebook's IPO did.
That said, S&P recently made adjustments to the S&P 500 without including Facebook in the mix. How long it will be able to ignore the elephant in the room is unclear, but what's pretty much certain is that when it comes to Facebook joining the S&P 500, the question isn't if -- it's when.
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