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Article / 01 November 2012 at 11:09 GMT

Facebook: Investors only sold a portion of newly unlocked shares

Strategist & Equity Analyst / Private
Denmark

Facebook

As part of Facebook's remuneration policy, it has granted millions of shares to insiders, such as long-term employees. These 'locked' shares could not be sold until a specific date. One of those days was supposed to be Monday, October 29, when 235 million shares were 'unlocked'.

Of course, the shares were not sold Monday or Tuesday because of super storm Sandy. But the New York City exchanges opened again yesterday, and volume in Facebook (NASDAQ:FB) tells me that shares are hitting the market. Average daily volume is around 50m shares, but we saw a doubling to 100m yesterday, which tells me that some FB stock owners are cashing in.

Strategy for big professional investors
When investors want to sell a rather large amount of shares, compared to the normal volume, then different risk measures are set in place to protect the overall investment. What a big investors want to avoid is "market impact" where the price is driven either higher or lower because of their own trading activity.

A normal strategy for them would be to participate in the overall trading during the day, and get an average price of the day’s trading, also called VWAP (volume weighted average price). To minimize market impact, they will normally put a cap on how much of the volume they want to participate in. This would normally be a maximum of 25-30% of the volume, to limit the risk of impact.

What to read of the volume yesterday
Given maximum participation of 25-30% of the volume, and with a total volume of 100m shares, I would expect a maximum of 25-30m of the newly un-locked shares have been cleared in the market. This would still leave a bit over 200m newly-unlocked shares ready on the shelf. These remaining 200m shares may continue to put some downward pressure on the stock price the coming days, assuming that all the recently un-locked shares are taken to  market. We don’t know if this is the case, but it outlines the potential pressure on the stock.

More shares coming!
Bear in mind that when the current pressure tapers off, investors should probably look towards 14 November, which is not that far away. On that day, 777m more shares are unlocked. There is a distinct possibility that the stock price will trade lower short-term as investors stare at this mountain of newly-available stock.

Risk
There is a risk that only a fraction of the un-locked shares will actually hit the market. In that case, expecting a much lower price on Facebook is probably unfounded.  Facebook came out with a better-than-expected Q3 report and it did lift the stock 20%. The risk of the un-locked shares is the major reason we are at these lower price levels. 

Overall there are some stiff headwinds short term, and I see a risk of a lower stock price over the coming days. 

  1. Apple - iOS6 and the implications for Google, Facebook...
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  3. Facebook analysts agree on price disagree on revenue, net income.
  4. The first flood of shares will be unlocked August 16th.
  5. Facebook stock is cheaper now - and maybe even be worth buying.
  6. Facebook - Opportunities risks and lots of volatility ahead
  7. Facebook Q3 results could be a perception changer
  8. Facebook new share un-locking structure cuts risk on Q3 earnings
  9. Facebook Why did its shares fall 9% on Monday
  10. Facebook earnings later today will they disappoint?
  11. Facebook a less risky investment after Q3 report

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