How did this happen? And more important, does it mean Facebook might finally be a good buy?
First of all, the lock-up expiration had already been widely anticipated. If anything, it was probably an entry point for institutions and hedge funds to move into the stock. Keep in mind that Facebook’s volume was 229 million shares yesterday versus its 55.5 million-share average.
A lock-up expiration doesn’t necessarily create a flood of selling. Over the past few years, Facebook’s stock was traded heavily on secondary markets at prices often above $30. So, why would these shareholders want to sell now?
It also looks like Facebook’s venture capitalists may be holding on to their shares, too. This is the case for Andreessen Horowitz. Yesterday the firm said: “[W]e believe in the longterm value of the company.”
Hedge funds have also been strong buyers of Facebook. In the latest quarter, Viking Global Management picked up 4.1 million shares, and Tiger Global Management boosted its stake from 2 million shares to 11.7 million.
Granted, these are all mostly technical factors. The real issue is whether Facebook can get back on the growth track. For the year, the quarterly revenues have decelerated by 55% in Q1, to 45% in Q2 and to 32% in Q3.
Yet there’s hope that Facebook will reverse this trend. Since the IPO in late May, CEO Mark Zuckerberg has made it clear that monetization is hugely important. And this is more than just talk. He has launched an e-commerce gift platform and a “sponsored stories” program for mobile devices. Facebook also has a new retargeting ad system.
While these are in the early stages, it looks like the results could be powerful. On the mobile side, the third quarter saw the annual run-rate at about $1 billion. It’s certainly impressive while other companies like Zynga (NASDAQ:ZNGA) and Groupon (NASDAQ:GRPN) have struggled with their mobile efforts.
Now, Facebook is still selling at a high valuation, with a forward price-to-earnings ratio of 34x. But it does look like the stock has found a bottom, which is about $19 to $20.
It’s probably a good idea to wait for the stock to cool off — which it has done several times over the past six months. Once it does, that could create an attractive entry point.
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.