When a hot stock starts falling after an overpriced initial public offering, Wall Street tends not to panic. It’s seen it all before. The street shrugs, blames hubris, and starts picking up the pieces—usually the stumbling shares stabilize, as growth investors see an opportunity in the post-IPO pessimism.
But then there’s Facebook. The social-network giant had a dreadful debut in May, marred by bungled underwriting and NASDAQ tech glitches. Then the price kept falling, each week bringing a new bottom. And today FB fell to $19: a new low and half its IPO price of $38. According to the Wall Street Journal, CEO Mark Zuckerberg—who has personally lost $600 million in the latest free-fall—has called the drop “painful” to watch.
Why the new low? At face value, the recent drop appears to have been caused by the expiration of an early share “lock-up,” imposed by the IPO underwriters to prevent insider trading. When that lock-up ended yesterday, it freed early investors like Goldman Sachs and Accel Partners to sell off their shares—which they did in the millions, sending the price south.
Other early investors, including Facebook employees, weren’t so lucky. They’re stuck with their holdings until mid-October, November, and December, when more batches of shares will become sellable. But yesterday’s lock-up expiration alone was enough to push Facebook trading volume to 156.5 million—four times its recent average. That’s a lot of pent-up desire to purge the stock.
Yet the two-day plunge seems too big to blame on just the lock-up expiration. After all, the schedule for these share releases has been public for months now, and some of the fall should already have been “priced in.” That is, the market—obsessed as it is with Team Zuck—should have anticipated this, and on expiration day, reacted far less dramatically. Considering the high trading volumes, and the total lack of surprise inherent in yesterday’s sell-off (which everyone predicted), why are Facebook’s shares still getting so hammered? Where are the stabilizing growth investors?
The answer may lie in Facebook’s dominant role within the digital sector: it’s the industry’s marquee business and its most-watched IPO ever. While initial bad news for a smaller company might have been attributed to opening-day jitters, Facebook’s dreary debut was seen as a death knell for the IPO market, and for the digital revolution writ-large. Facebook is now serving as the scapegoat for a wave of tech pessimism. So much was riding on the IPO that when it stumbled, it sent the street’s animal spirits into industry-wide negativity. In short, Facebook is too big not to keep failing.
Apocalyptic media coverage hasn’t helped. In the financial press, the fall of Facebook has been spun out like a Sophoclean tragedy. Still, this feverish sell-off appears to go a step beyond fundamentals in the tech sphere. All major stock benchmarks, including the Nasdaq Composite Index, are nearing year highs. According to the marquee Thomson-Reuters/UMichigan Consumer Sentiment Index, which unexpectedly jumped today, American buyers are at their merriest in months. And purchases of retail goods—correlated with the fortunes of the tech sector—rose in July for the first time in four months.
In short, Facebook is too big not to keep failing.
To illustrate, I’ve graphed Facebook’s cataclysmic stock slide (down 50 percent since May 18) against the Nasdaq Composite Index (up more than 10 percent) and the S&P 500 Information Technology Index (up over 11 percent).
Consumers are happy. Corporations are rallying. But Facebook continues to fall because of an overreaction to the company’s digital heft and the buzz of its IPO. As more lock-ups expire, we can expect to see the price fall even more, as it did yesterday. But don’t blame Zuck. The Facebook exodus is of our own making.