We believe Facebook (FB) stock is facing pressure similar to what occurs when a company issues a "death spiral" convertible security. In this case, short sellers drive the price of the stock lower, which in turn lowers the conversion price of the common stock from the convertible security. While there is no convertible security issued by Facebook, the Facebook option holders and newly unrestricted shareholders may mimic this activity as follows: they watch declines in the price of the stock which may be caused by short-sellers and in response, fearing further losses, they decide to aggressively their holdings in order to preserve what value they have left.
Facebook has described in its filings that restricted shares and options have been with the expiration of the lock-up period which started on the date of its IPO. In addition to the additional float, Facebook faces dilution through certain securities. This dilution comes through the exercise of stock options such as FB's Restricted Stock Unit grants, Incentive Stock Option grants as well as the vesting of conditional shares made to company vendors, employees and advisors through financing, merger and acquisition activities conducted through Facebook's hyper growth over the last seven years.
We highly recommend that investors read FB's most recent 10Q filed with the SEC. An important excerpt is highlighted in bold below:
" Substantial blocks of our total outstanding shares may be sold into the market when "lock-up" or "market standoff" periods end. If there are substantial sales of shares of our common stock, the price of our Class A common stock could decline.
The price of our Class A common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers, employees, and significant stockholders, or when there is a large number of shares of our common stock available for sale. As of June 30, 2012, there were 640,605,043 shares of our Class A common stock and 1,500,952,264 shares of our Class B common stock outstanding. Shares of our Class B common stock are convertible into an equivalent number of shares of our Class A common stock and generally convert into shares of our Class A common stock upon transfer.
The 180,000,000 shares of our Class A common stock sold in our IPO are freely tradable in the public market. The remaining shares of our Class A common stock and Class B common stock, as well as the shares underlying outstanding RSUs and shares subject to employee stock options, will be eligible for sale in the public market in the near future as set forth below:
Date Available for Sale into Public Market
Number of Shares of Common Stock
August 16, 2012
271,123,815 shares held by the selling stockholders in our IPO other than Mr. Zuckerberg
Date between October 15, 2012 and November 13, 2012
approximately 133 million shares underlying net- settled Pre-2011 RSUs held by our directors and then current employees and approximately 55 million outstanding shares and approximately 55 million shares subject to stock options held by then current employees other than Mr. Zuckerberg
November 14, 2012
approximately 1,197 million outstanding shares and approximately 20 million shares underlying other net-settled Pre-2011 RSUs
December 14, 2012
149,432,006 shares held by the selling stockholders in our IPO other than Mr. Zuckerberg
May 18, 2013
47,315,862 shares held by Mail.ru Group Limited and DST Global Limited and their respective affiliates
In addition, as of June 30, 2012, options to purchase 45,693,252 shares of Class B common stock held by former employees were outstanding and fully vested and the Class B common stock underlying such options will be eligible for sale on November 14, 2012. Furthermore, the remaining 60,000,000 shares subject to the partially exercised stock option held by Mr. Zuckerberg will be eligible for sale on November 14, 2012. We expect an additional approximately 4 million shares of Class B common stock to be delivered upon the net settlement of RSUs between the date of the initial settlement of RSUs described above and December 31, 2012 will be eligible for sale in the public market immediately following settlement.
Certain holders of our Class A common stock and Class B common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. All of these shares are subject to market standoff or lock-up agreements restricting their sale for specified periods of time after our IPO. We also registered 1,182,700,275 additional shares of common stock that we have issued and may issue under our employee equity incentive plans on Form S-8, all of which will be freely tradeable in the public market upon issuance, subject to existing market standoff or lock-up agreements. "
On average volume days when trading is less than 35 million shares, Facebook shares appear to trade in a machine to machine pattern. This pattern resembles the one we wrote about in another article about ECNs -Electronic Communication Networks. ECNs are creating volume through High-Frequency Traders or HFTs.
This was the subject of the controversial book "Broken Markets." The authors of Broken Markets contend that these HFTs are in virtual control of many stocks. The HFTs are compensated by the ECNs through the use of rebates which virtually guarantees HFTs a profit. HFTs are allowed and encouraged to engage in this activity to add "liquidity" to the market. If in fact this is occurring in the FB stock trading volume, it could be masking true buyer interest in Facebook stock. We believe the absence of real buyers for Facebook shares would not be good for the additional shares in the Facebook trading pool.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Being short Facebook seems to be the flavor of the month.