Why Facebook’s Stock Looks Locked And Loaded


Mark Zuckerberg, founder and CEO of Facebook (Photo credit: Wikipedia)

“I’ve been called a lot worse.” This continues to be my response to those proclaiming me as a Facebook apologist. Although I don’t currently own the stock, I will concede that on more than one occasion I have come to the company’s defense. It seems whenever Facebook is being discussed, there is no middle ground – either you “like it” or you hate it. But what I find irritating is that too often it draws indignation from greedy investors seeking revenge for being hurt by their own failed due diligence. My response – whatever happened to personal responsibility?

Nonetheless, I will admit that the social media giant does deserve its share of criticism. Aside from a botched IPO and some public relation gaffes, which the company will admittedly regret, Facebook has been battling flaws with its execution – particularly its mobile strategy.

Nevertheless, some perspective is needed here. Still, this is a company with now only two quarters under its belt as a public issue. It is not Google and it is certainly not Apple. So let’s put the talks of its legacy away for now and appreciate that the company is in the midst of a pretty significant transition – one that begins now on the heels of another expiring lock-up period of the company’s stock.

Can Facebook Close Another Lock-Up Chapter Quietly?

For those unfamiliar to IPOs and in particular lock-up expirations, as part of early standard startup procedures, companies will typically issue millions of shares to (among others) employees, venture capitalists and mezzanine investors. However, these early shareholders will want to cash out. So as a way to prevent shares from flooding the market, there’s the “lock-up” period, which in essence is a ban on selling the stock for a predetermine period following the initial public offering.

This being Facebook’s third expiring lock-up period, was preceded by two others – first in August and another in October. However, this is by far the company’s biggest in terms of potential sizable impact as it consists of over 800 million shares, or roughly 60% of the float. As of the most recent quarter Facebook had 2.17 billion shares outstanding. By comparison, the float on Google and Apple stand at (only) 328 million and 940 million shares respectively.

So Facebook’s float is pretty remarkable by any standard. Likewise the idea that 800 million shares can hit the market for a stock that already trades 50% below the high of its IPO price has to be a concern. Will early investors look to move on with their lives and see this as an opportunity to dump what have been failed promises or can Facebook escape this period quietly? The good news is that early indicators suggests that nobody plans to bail.

Editing Errors And Turning The Page

That Facebook shares spiked up by over double-digits last week implies that the stock just might be locked and loaded for a resurgence. But for the stock to work long-term the company still has to execute. By and large, its mission is now clear. Aside from making tons of money, the company seems committed towards returning value to shareholders. More importantly, to that end Facebook has become more focused in creating products and services that enhances the user experience.

As a consequence, it should not be far-fetched to expect that in the near future mobile ads will become at the center of a very large and profitable social enterprise for Facebook. So far, this has been reflected in the company’s performance. For instance, in the most recent quarter overall ad revenue soared year-over-year by 43% while jumping 33% sequentially. But even more impressive was that 20% of the revenue came from mobile devices. Investors should find this particularly encouraging since Facebook’s chief form of criticism has been directed at its inability to monetize mobile.

I expect this trend to continue, in part because Facebook has recently been integrated into Apple’s IOS. And considering how well the iPhone 5, iPads etc. have been selling, I think it is reasonable to expect Facebook to draw increasingly more benefit from this exposure. Likewise, this helps the company compete more effectively with other ad-thirsty rivals such as Google, Yahoo and to a lesser extent Microsoft.

Bottom Line

Though Facebook still has plenty to prove, it is also encouraging that analysts have recently raised their average estimates while also upgrading the stock. What the bears have noticed is that the company has been working hard to reconfigure its model as well as its approach in terms of monetizing its now 1 billion user base. Essentially, those who rushed too early to write Facebook’s epithet have done themselves a disservice by not having a good perspective of the company’s real potential. “Apologist” or not, Facebook appear to have turned the page of its growth potential. Likewise, the stock looks locked and loaded for an upward surge.

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