Facebook frees up 60% more shares today
bloomberg.com
bloomberg.com
"Facebook, worth $51.2 billion, has lost about $40 billion in market value since the IPO, making it the worst performer among all large IPOs on record, according to data compiled by Bloomberg.
. . . .
"'It certainly wouldn’t behoove and wouldn’t be in the shareholders’ best interest to dump the shares on the market all at once,' [Harding] said. 'I would assume that all of the investors that hold the 270 million-odd shares are probably rational, and probably realize that flooding the market with that kind of supply over such a short amount of time wouldn’t help their position.'"
By contrast with Mark Harding, the analyst at JMP Securities LLC quoted in the article, I would keep in mind the old saying "The market can remain irrational longer than you can remain solvent," and be very concerned about other investors looking out for Number One and thus depressing the price of Facebook stock for all other holders of Facebook stock. Over the next several weeks or months, those of us who are looking on (I don't own any Facebook stock) will see what the various investors decide. Thus far, all the trading activity seems to agree in general that Facebook shares will not recover their IPO price any time soon.
So that may be contributing to the selloff today
This reasoning seems flawed to me: He seems to not understand that the rational choice for individuals acting independently is often not rational for the group as a whole. The Prisoner's dilemma, Bank runs etc. are all examples of how this can happen.
If everyone else is in danger of selling and pushing the price down, you're better off selling now before that happens... and of course, everyone else would reason the same way, making it a self fulfilling prophecy.
If the shareholders had some way to collaborate and agree collectively to not sell now, his statement might be correct - but I doubt this is even legal even if it was feasible.
Of course, if you're in it for the long haul, then other people's opinions of the stock price shouldn't matter: you just buy/sell facebook stock based on whether you think the future expected dividends justify the investment.
The interesting problem here is what employees will decide to do. It's not obvious that Facebook stock will go up any time soon. It's probably a reasonable thing for employees to diversify their holdings (which means liquidating a large portion of their facebook stock). It will be interesting to see how individual employee decisions end up pushing the stock price.
https://en.wikipedia.org/wiki/The_Logic_of_Collective_Action
But I believe it. Shares in a company are real assets, and this is the Valley. Interesting story.
It's a hard lesson. I have been burned on the promise of options too many times to believe that they will ever turn out like goog did.
Sucks for the employees of FB, but I am happy that we are seeing sanity in the valuation and it is not insanely over inflated via hype.
Quote from one of many available sources, this one comes with graphs: http://www.maureenterris.com/?p=2557
SF/Silicon Valley was insulated against the rest of the country's housing crisis largely due to its strong tech sector, which didn't suffer the recession as severely.
I don't know about people using pre-IPO stock to get loans, but the connection is less tenuous than you might expect.
You don't see huge deflating going on, right? Prices have fallen a lot in some places in the Silicon Valley (like San Jose), but remained quite high in others, primarily on the expensive (1M+) end of the market.
And those insiders should sell parts of their positions. They are very heavily invested in FB and need to diversify, even if they believe FB is a very wise investment. Many insiders probably have more than 90% of their portfolio in FB stock.
Assumption you're making: That FB is overvalued currently, and has 15% to fall (it's at 20 now, and you are saying it will go down by $3 by the 18th [tomorrow!!!])
I'm not sure where that $0.48 is coming from in your comment. At expiration (when an option has no time value), a put should be worth StrikePrice - StockPrice. So if Strike is $17, and stock is... say... $15, the option will be worth $2 ($200 since each option actually controls 100 shares). That math changes with the stock price, so I'm not sure what you're talkinga bout with $0.48...
Also note that spreads at the low end of options will eat you alive. Specifically you should expect to pay upwards of $10 or even $15 to get anybody to fill you on those options. The $4 amount is highly unlikely to get filled, especially at the qty you are talking about.
Basically, this is a bad idea, and will just lose you $400.
How long has it been like this?
It's still perfectly possible to be a fundamentals trader/value investor and make a decent income. Look for undervalued companies or those everyone is selling, buy their stocks, hold them for the long term and be prepared for a bit of up and down. But there people who want to buy and sell these complex derivative contracts (well actually an option is pretty much the simplest derivative contract there is), and so the market will join them up with each other.
This is, of course, in contrast to a lot of financial instruments (particularly in the last couple of decades) that are needlessly complex (where at least some of the value for the issuer is in obfuscating the actual implications of the security from the buyer).
On one hand, you can have infinite risk strategies, on the other, you can lock in a stock price almost exactly, with little market risk. And then everything in between (ie, you can easily build something that's like: "I think this stock will go up a few bucks, but nothing crazy", or maybe: "I'm worried about a horrible plunge, but a minor decline is fine, I'll buy a put out of the money and have coverage for the plunge".)
And really, it's fairly simple, a lot of the stuff I said about "time value" and such was related to how you value options, not the actual complexity of the thing itself. "How much is this worth" is always tricky, even for something as easy to understand as a bond.
Organized markets, and bubbles, and derivatives are all old. And they aren't inherently bad either.
You have to look at futures & options as a way to sell or buy risk. If you're willing to pay somebody, they'll take your risk away. And the other way, if you want to take on some risk in exchange for money, you can do that.
(note, that last thing sounds scary, but how about this: sell a put [ie, promise to buy a stock at a certain price] right near where you want to buy the stock anyway [with a traditional limit order]. If it gets to below that level, you get 'assigned' the stock, which you wanted anyway, at the price you wanted anyway. If it doesn't hit that, then you wouldn't have bought the stock anyway. The counterparty gets insurance against their stock dropping. You take on the "risk" of it dropping, but you've set yourself up so that it works out for everybody involved).
(note that last strategy doesn't work if the stock temporarily dips, then pops back up. You probably won't get assigned in that situation, where a limit order would have triggered. That risk is what you get in exchange for getting paid for selling the put).
Presumably the point is that not everyone is expecting the next couple of days to be "normal", given the amount of shares potentially going on the market as the lock ups end. Obviously that doesn't necessarily make the mentioned deal a good one, but it doesn't make much sense to assume anything about the stock price movements today based on the limitations of yesterday.
How would you evaluate the risk/reward profile of this option?
It's perfectly reasonable for Microsoft to hold on to their shares--even if facebook goes broke they still have billions in cash.
Thiel will probably sell part of his stake--you don't hang on to 1.5 billion by being overly concentrated in any one area.
Other investors (VC's and funds) will almost certainly sell most or all of their stakes. There's no expectation of 10x or 5x returns anymore and a fair amount of downside risk.
I expect 90% of individuals with stock options to sell as they can. If I have a choice between selling at $20 now and getting, say, $200,000 or waiting some unspecified time and possibly getting more (or nothing), I'm going for the sure money every time. Even for someone whose pay is in the low six figures, option money like this can mean paying for your kids' college education or starting your own business. The only ones who might hold on would be those who don't have many shares/options (I'm thinking less than 2,000).
Common shareholders are last in line when a company goes broke.
I think there's still a lot of energy/optimism at Facebook inside its own Reality Distortion Field. Even if Facebook doesn't recoup its value for years, there's still a lot of money to be bad. Remember that not everyone makes the same decisions you do.
One thing to keep in mind however, is that it is not uncommon for companies to do a re-price of their stock options if the options are worthless. I wouldn't be surprised to see FB do this if the stock hangs this low for a while.
If so... how can that market be disrupted?
Without a revenue plan and saddled with immense costs, that company is generally not fiscally healthy, certainly not enough to justify 100x valuation over annual profits.
Advertisers have valued them at a few billion dollars. The stock purchasers put that value at over $100bn. For some reason, people took the stock purchaser's word over the actual customer's word.
Besides, the Street made their money off of this deal a long time ago.