Shares of Facebook Inc jumped nearly 13 percent on Wednesday, as
investors breathed a sigh of relief that expiring trading restrictions
on a huge block of shares failed to trigger an immediate wave of insider
selling.
"While the lockup is expiring, there is nothing requiring
anybody to sell," said Tim Ghriskey, chief investment officer at Solaris
Group in Bedford Hills, New York. "Given the low price, these long-term
holders are deciding to hold the stock, and that is lifting it here as
the fear of the expiration subsides."
Roughly 800 million Facebook
shares were eligible for sale on Wednesday after restrictions on
insider selling were lifted on the biggest block since Facebook's May
initial public offering.
The lockup expiration greatly expands the 921-million-share "float" available for trading on the market until now.
"We've
seen this before with other lockups. People sell them leading up to the
lockup period expiring, and then they have a bit of a relief rally,"
said Ryan Jacob, chief executive of the Jacob Funds, which does not own
Facebook shares.
In August, shares of the online reviews website Yelp Inc
surged by more than 20 percent on the day that insider trading
restrictions expired. That stock's rally was boosted as short-sellers
scrambled to cover their positions when the expected flood of selling
failed to materialize, say analysts.
Facebook shares
finished Wednesday's regular trading session up 12.6 percent at $22.36
on the Nasdaq, with trading volume for the stock more than four times
the average during the past 50 days.
The world's No. 1 online
social network became the only U.S. company to debut with a market value
of more than $100 billion. But its value has dropped nearly 50 percent
since the IPO on concerns about money-making prospects over the long
term.
Insider trading lockup provisions started to expire in
August, and the rolling expirations have added to the pressure on the
stock.
Restrictions on insider selling have expired in waves. A limitation on more than 200 million shares expired on October 29.
Cost of shorting
Pivotal
Research Group analyst Brian Wieser said he did not expect Facebook
insiders to sell all of their shares as the lockups expired.
"I
would expect heavy volumes over the next few weeks, but not undigestible
volumes," said Wieser. By his estimate, roughly 486 million of the
nearly 800 million newly freed Facebook shares will be sold.
There
is some evidence the heavy interest in "shorting" the stock was
dissipating, given the poor performance since it first sold shares in
May. Investors who believe a stock will fall can bet against it by
shorting the stock - that is, borrowing it and selling it in the hopes
it will decline.
According to Markit, a financial information
services company, about 28 percent of the shares available for
short-selling were being borrowed for that purpose, down from a high of
more than 80 percent in early August.
Similarly, SunGard's Astec
Analytics, which also tracks interest in shorting, noted that the cost
of borrowing Facebook shares is down more than 50 percent since the
beginning of the month.
"Everything would seem to indicate the
market is losing its appetite to short Facebook," wrote Karl Loomes,
market analyst at Astec.
The cost of shorting Facebook has
declined to 0.18 percent on an annualized basis, Astec said on
Wednesday. By contrast, shortly after the IPO, the cost to short the
stock ranged from 40 percent to 50 percent annually.
"It's become
somewhat of a controversial stock. It always adds fuel to the fire if
you have a sizable short position," said Stephen Massocca, managing
director at Wedbush Morgan in San Francisco.
"But the unlock is
not new news. It doesn't mean everyone is going to sell, and it doesn't
mean every order is going to come in today."
Facebook, with
roughly 1 billion users, has faced a tough reception on Wall Street amid
concerns about its slowing revenue growth and nascent advertising
efforts on mobile devices.
But the company delivered
better-than-expected third-quarter results on October 23 and revealed
that 14 percent of its advertising revenue is now from mobile ads,
reassuring some investors it was beginning to figure out how to earn
money from smartphone and tablet users.
"They had a pretty good
quarter. I think a lot of investors, though, are waiting to see some
consistency in the results," said Jacob.
Several members of
Facebook's senior management have sold millions of dollars' worth of
shares in recent weeks through pre-arranged stock trading plans as
lockup restrictions expired.
Chief Operating Officer Sheryl
Sandberg has sold roughly 530,000 shares this month, netting just over
$11 million, though she still owns roughly 20 million vested shares in
Facebook.
In August, Facebook board member Peter Thiel sold
roughly $400 million worth of Facebook stock, the majority of his stake,
when an earlier phase of lockup restrictions expired.
Facebook's 28-year-old chief executive, Mark Zuckerberg, has pledged not to sell any shares before September 2013.
"I'm
sure we're seeing some selling from guys whose shares are unlocking,
but the supply is not nearly as much as everybody expected," said Arvind
Bhatia, an analyst with Sterne, Agee & Leach.
© Thomson Reuters 2012