When Facebook (NASDAQ:FB) reported its earnings in late October, the stock shot up by about 21% to $23. The company showed that it was getting traction in its mobile business.
Unfortunately, the rally turned out to be short-lived. The stock is now trading at $19.80.
What went wrong? Keep in mind that a flood of stock has come onto the market because of lock-up expirations. These allow employees to dump their holdings. In fact, tomorrow will be another expiration, which will make a whopping 800 million shares available for sale.
While it’s true that not all the holders will put in sale orders, selling pressure will probably continue. Consider that a big part of compensation for Facebook employees is stock. Besides, it isn’t cheap to live in Silicon Valley, as seen in the region’s nose-bleed real estate prices.
But there may be another factor: taxes. In case capital gains rates increase next year, employees will probably want to take profits now. The hike won’t just be on the federal level, either. California will also likely see tax hikes.
With tomorrow’s lock-up expiration, the number of outstanding shares will jump from 921 million to 1.721 billion. That’s a pretty big number, and it will take a while for the market to absorb.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.“ Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.
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