Facebook shares rose by 13% after trading restrictions expired and roughly 800 million FB shares became available for sale nearly doubling the free share float to 1700 million shares. The result was a feel good effect for investors who had been battered since the May IPO repeatedly by short sellers every time the periodic lock in periods hadexpired. The moot question is how long will the rally and the feel good effect last ? Brought about by a strategic three part operation devised by the company and its under writers the scrip climbed a major psychological barrier that was close to a fight back. The first real show of resistance to give confidence to investors that the share is holding its own despite doubling of the free float. The longer the share stays at the current level above $22 the better will be the chances of the scrip to revive.
The underwriters led by Morgan Stanley have already spent over $70 million in trying to shore up the highly rated scrip that had been witnessing lack of investor support ever since its overvalued IPO in May. How much they put in this time to buy off the floating stocks when volumes surged during the first hours trading is still not known. Unconfirmed reports say that as a second leg of defense the under writing Banks were able to convince early investors and FB board member Andreeson Horowitz to desist from selling nearly 5 million shares to the market and instead transfer it to limited partners, a euphemism for bank financed buyers of Facebook stock. The third strategic move was reportedly to hold back issuance of over 200 million shares that the company refused to confirm saying that they do not respond to speculative news.
Facebook shares that started trading at the IPO price of $38 in May fell to its lowest price of $19.69 after the initial lock up period ended in August. Majority of its easily investors Accel Partners, Goldman Sachs, DST Global, Meritech Capital, Greylock Partners, Peter Thiel and several others sold part of their stake to book early profits Despite two more rounds of lock up expiry the share has stood its ground after recovering somewhat from the initial setback. The long term test would be to keep the share price above the psychological barrier of $20. For that to happen the Company needs to persistently perform, which is particularly difficult in a area that is still pretty uncertain and exploratory in nature. The only way to beat market expectations in the long term is to consistently upgrade revenue from mobile ads. In the third quarter, Facebook recorded $153 million in sales from mobile advertisements which accounted for nearly 14% of its revenue and caused the market rally in Facebook shares. FB would have to consistently improve the numbers in this segment, for the share to remain in the confidence of the investor.