Facebook's stock performance continues to disappoint the investment community. Yesterday, FB closed at $25.89, down $1.03; the IPO price was $38/share, so the stock has declined about 32% since opening day. What should those interested in FB be watching for in the days ahead? The following seven events and contingencies could impact FB’s stock price in a meaningful way.
1. Overall Market Performance. The stock market is being pummeled by unsatisfying news. Unemployment is not decreasing; economic activity is not accelerating; the European Union is in more disarray every day (it seems); the impending U.S. elections are weighing heavily on our minds; and the total impotence of Congress and our president is depressing business people and the general public alike.
2. Short Sellers. It is very difficult to tally the number of FB short sellers in the market. However, it is increasing rapidly. These are investors who will make money if the stock price goes lower (You sell 100 shares of FB stock at $25 now, and buy it back at $20, hypothetically, in two weeks. You earn $500). Short selling is perilous because, theoretically, there is unlimited risk if the shares increase in price. You sell 100 shares of FB at $25 now, and buy it at $50. You lose $2,500. If the stock increases to $75, you lose $5,000. And so on. In any case, a huge short selling overhang results from pessimism affiliated with a stock and its valuation. The trend is not good relating to FB.
3. Opening the Books. FB is scheduled to meet with analysts in July, at which time the company will probably discuss its operating results. If its performance is unsatisfactory, the stock will go lower. On the upside, the most we can expect is that a favorable report will stabilize the stock price. Longer-term positive performance will be necessary for FB to see an improving stock price.
4. FB Lock-Up Period Will End in Several Months. I have mentioned this in previous essays written about the company. The potential number of shares that could hit the market from employees and other insiders could be very large. A huge supply of stock to be sold will have a profoundly negative impact on the stock price. Recent IPOs have had very bad trading sessions on the days that their insiders stock was free to trade.
5. Company Comments. I am amazed that FB has not reacted to the rumors and spin floating around the market. Some encouraging words from management, if things were running smoothly operationally, would go a long way towards settling investors.
6. Litigation. The litigants are mounting day by day. Institutional and retail investors are very unhappy and feel like they were taken advantage of. There is some “sour grapes” in their sentiment as even sophisticated investors were caught up in the hype and euphoria of the FB IPO. Investors were expecting too much while the company and its underwriter were overreaching on size and pricing. Many will file lawsuits. They will be costly, disruptive and depressing (emotionally and to the FB stock price).
7. Investigations. Regulators, Congress, analysts and the press are going to look for misbehavior on the part of the company, its underwriter, and its attorneys. Accusations will fly, and performances will be rated unsatisfactory. Hopefully, there will be no criminal violations uncovered. This will create negative pressure on FB stock. The most depressing thought is the specter of congressional hearings on the FB matter that somehow becomes fodder for the presidential campaign. Do not put it past the most despicable in Washington and at super pacs to try to make hay on this aspect of the FB debacle.