Facebook (FB) stock is expected to take a big hit Wednesday when existing stockholders sell off a huge quantity of shares, but the message the stock market sends to onlookers may be the wrong one. The share dump everyone expects to happen tomorrow has nothing to do with Facebook’s viability as a strong business, nor does it reflect stockholders’ opinion that the stock is not valuable. In fact, the reason stockholders will be selling shares is to cash in on the fortunes they have only had on paper, until now. The real value of Facebook’s stock is tied to its long-term outlook for being a profitable business, not short-term emotional reactions to daily stock price fluctuations.
For those stockholders who hold, or even buy more, stock long-term Facebook stands to be a huge win. The user base the company already has, as well as its untapped sources of revenue and profits have yet to even scratch the surface of the company’s long-term potential.
The shares expected to be sold off are those owned by long-time Facebook employees and early investors who have had to wait to translate their paper wealth to spendable cash. Because of the way Facebook structured its classes of stock and its initial public offering (IPO) many stockholders were prohibited from selling their shares for some period of time after the IPO to avoid exactly what is anticipated tomorrow, a big stock price drop.
This is not unusual in IPOs and even in many merger situations, where companies structure lockup provisions to prevent large scale stock sell offs all at once. The best these lockups can do, however, is to stagger the times large blocks of shares can be sold off. This creates a series of smaller blocks of selloffs, with the hope this will temper the markets response and not crater the stock price too severely. The problem Facebook has is they simply have so many share and so many early shareowners who want to cash in, so there is certain to be a short-term hit on the stock price.
Once you remove the short term blip from this share sell off, the long-term stock price for Facebook is likely to creep upward for some time to come. Facebook is still a relatively young company, not even a teenager, at less than ten years old. With so many untapped markets and so many potential products the company has yet to create and monetize the upside potential for the company is hard to estimate, but it will be huge.
Take as just one example Facebook’s growth in mobile advertising. Facebook’s single biggest day of stock price gains came last month when the they announced third-quarter earnings and announced that their efforts to monetize their mobile user base are gaining ground. Just this one announcement caused the stock price to shoot up 19% the next day.
Short-term stock price fluctuations are nothing more than the manifestation of emotional knee-jerk reactions by stockholders who many times don’t understand how to properly value a stock in the first place. Keep an eye on Facebook stock long-term and you are likely to look back on some of these price spikes with a different perspective.
