Why Did Facebook's Value Drop by Nearly $5 Billion?

Includes: GRPN, LNKD, P
by: Mark McQueen

Did Farmville stop selling tractors?

SharesPost reported another secondary sale of Facebook Class B common shares this morning, although the deal was actually printed on July 29th. Surprisingly, the price has backed off C$2 to C$34. It cleared a snick higher than the C$33/share level that we saw during May, but meaningfully below the C$36/share level clearing price that was reported as recently as Tuesday of this week (which likely means it was papered on July 27th). The usual 150k shares traded at this new level, at an implied $80 billion valuation.

So what made Facebook’s valuation drop $4.707 billion in the space of 48 hours?

The stock market has been crappy of late, this is true. And Mark Zuckerberg’s sister Randi announced her resignation, which was reported in the media yesterday. As blocks go, $5.1 million isn’t large enough to back the quote off. On the public markets, LinkedIn (NYSE: LKND) shares rose 3% and Pandora’s (NYSE:P) came off more than 20% over the last week or so, which doesn’t tell us much.

And that’s the challenge with private market trading. There’s so little information to rely on when you place your bet, I mean invest your money. Do I think that Facebook is unfairly valued at 8x LinkedIn’s current liquid market cap? Definitely not.

But can anyone inside or outside the company clearly explain a $5B drop in value? That’s the question to ponder. Were existing Facebook employees or investors so spooked by the U.S. debt ceiling machinations, or the state of Italy’s economy, to pitch shares lower than what was available to them in February, April or June? You’d assume as much, but the buzz around a near term IPO within the company may also be waning given the reported hassles that Groupon is having with the SEC, causing folks to take what’s on offer.

More likely, the sagging share price is explained by fact that there have been seven different secondary sale trades reported by Sharespost between July 25th and August 4th. July 25th’s reported secondary cleared at C$36, from July 27th through to August 2nd it went for C$35, and then rose to C$36 again on August 2nd. It then cleared at both C$35 and C$34 on August 4th.

The same thing happened in June, when a flurry of private share sales over a 10 day period pushed the valuation down C$2.50/share, to C$32.50 on June 24th (which was the same price Facebook was trading at on Feb. 3, 2011). That’s likely the lesson for any patient, would-be buyer of Facebook shares: consider putting your bid in below the “Reserve Price” and seeing how much additional stock comes to market after the first trade or two is contracted. You would’ve got your fill in February, May, June or August.

It would appear that even the most valuable social media company in the world can be bought on dips.