6.7% down. It looks like it's already passing it's 30-day VMA. This is bad news because the unfreezing dates have been known since IPO, and the large volume implies that people are eager to liquidate their shares.
A fall when a bunch of people can suddenly sell is a normal thing.
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.
"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.
There's pretty much guaranteed to be a temporary dip, because there will be some people who own facebook stock that just came out of lockup and need to sell at any price (perhaps they've just got divorced or something). Holding on for at least a couple of days until the market settles down is the rational move for everyone except those few who absolutely have to sell now.
Many large asset managers have mandates to sell their losers and cut losses, or may be window dressing before the end of the quarter and don't want to show to clients that they hold any FB stock on their book.
From my understanding, Facebook is not owned by a lot of institutional investors and asset managers. If you look at the 'Inst. own' metric in Google finance, it says 7%, which is fairly low. I could be misinterpreting this however? Can someone confirm this?
"'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.'"
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 problem is that a lot if people bought these shares under false pretenses. Decent returns are not visible to anyone who is truthful and open minded. There are two paths in this circumstance - sell now and cut your losses by buying something that will return better, or sell later at an almost certain lower price, and lose that potential in the mean-time. If it were me, I'd cut and run now.
There weren't a lot of "false pretenses". Anyone who bought Facebook post-IPO did so with access to a lot of information that said the company wasn't worth 100 Billion dollars. There certainly wasn't a clear path to them being worth more than that any time soon (which would make holding the stock fairly pointless). Facebook needed a lot of breaks to ever get the stock above the IPO price. That was (and still is) a long-shot. The fact that people bought post-IPO stock with irrational expectations isn't a problem (at least not for anyone other than the buyers, who paid a lot to learn a valuable lesson).
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.
Nah, the tragedy of the commons describes more specific things. Like catching all the tuna until they are extinct. This is more game theory. Pretty simple game theory, but still information/coordination related game theory.
And how do you propose they run down the price? Someone needs to be buying on the other end, and there are a shortage of those. That's why the price sinks.
Besides, the Street made their money off of this deal a long time ago.
...and it tanks again. Many facebook employees purchased houses using facebook stock. That is, they didn't have enough income to qualify for a loan, but they showed their facebook stock + current market price(pre-ipo), and got approved that way. So one bubble(FB), inflated another bubble(housing), and it's all deflating before our eyes. The fact that facebook employees are tanking/will tank this stock further should tell you something. I believe the employees start selling en masse in October, so this is just the warmup. I'm betting we'll see $12.
Sounds bit of an odd practice to me, since a mortgage is such a straight-forward, easy-to-get loan that the Mexican landscaper can get one even though he doesn't live in the country.
But I believe it. Shares in a company are real assets, and this is the Valley. Interesting story.
Mexican landscapers can't buy multi-million dollar homes (assuming that's the range we're talking about here). Other than that, can't really feel sorry for hurt millionaires, it sucks for them, but there are more pressing problems in the world to worry about.
actually pretty common for high net worth individuals. If you earn 300k a year but have stock worth $10m then yeah banks will lend you way, way above what your income alone would support (ot at least they did prior to the credit crisis. One of the lehman bosses had loans of nearly 50m collaterised with his stock... which went to zero)
Considering the housing bubble peaked 5 years ago, way before FB was valued at $100B, and has been deflating ever since, I find your connection tenuous, at best.
"Across the country, home values fell 15% to 60%, peak to bottom, depending on the area and how badly it was affected by foreclosures — most of San Francisco got off comparatively lightly with declines in the 15% to 25% range." In SF, the bubble was effectively flattened. Other areas saw loss of value beyond pre-bubble prices.
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.
And the bubble deflation barely touched the silicon valley, thanks to employees in the valley engaged in bidding wars on homes. Yes it deflated a little, but that's peanuts compared to other parts of California where people literally lost their entire net worth. Combine Facebook employees, Apple employees and investors from China and you have another bubble.
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.
I'm curious, and would love to hear FBers comments on this: how many shares do employees typically have? At what price point (or were they RSUs)? What's the vesting period?
It's funny that all these analyst can talk about such vague suggestions when it seems clear that different investors have clear motivations here.
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).
Beyond the strict money value of those shares, Microsoft gains business value from being a large and influential investor in Facebook. That can make up for quite a bit of strictly monetary opportunity cost.
> 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).
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.
I imagine a good number of employees have stock options, which means that, depending on the price of the option, they would not have any value to them.
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.
I've always been curious about trading options. It seems like now is a good time to buy the FB120818P00017000 put for example. I honestly don't see the downside to this. That option is trading at $4 for a block of 100. So investing $400 get's you 10000 options. If the price of the stock dips below $17 the option could trade at 48 cents in which case you've turned $400 into $2400 (minus transaction fees and taxes). On the other hand you could lose your $400 which isn't that bad. What's are the downsides here that I'm missing?
Downside is obviously the 100% loss you'd take on the $400.
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.
After reading this, it seems like way too much complexity exists in the market. Me and my naive thoughts of "it's just simple buying and selling, right?"
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.
Futures and option contracts have been around for hundreds of years and there is some evidence that ancient societies also had similar financial instruments.
To be fair, options/futures are pretty simple and have uses that most people would count as legitimate. A farmer buying oil futures to mitigate the cost of a potential spike in fuel prices (and thus his costs) is basically just him buying insurance; trying to smooth out any crazy volatility his business may face is a fairly legitimate and straightforward application of finance.
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).
Options are really cool since they are so well named. They really do give you a ton of options to adjust your risk to exactly what you want.
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).
Good point about the expiration. If I was betting on the $17 figure I would buy options that expire in a few months. The 48 cents was just a conservative number to throw out there (value of puts w/ $17 strike price would probably be higher if the stock is significantly below the strike).
That option expiries in 2 days - very unlikely it will drop $3 in that time. Historical volatility for FB is around 6% for a 2 day move which at current level is about $1 in price terms. So you need a 3 standard deviation move for this thing to be in the money, i.e about 1 in 1,000 chance. I'd sell you that :)
Historical volatility for FB is around 6% for a 2 day move which at current level is about $1 in price terms.
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.
I don't mean to imply that stock prices are perfectly normal/lognormal/insert your favorite distro here. Nor do I mean to imply that future price action will match past price. It's just a simple model to illustrate that compared to historical price action you'd need a pretty big 2 day move for the stock to hit $17.
How would you evaluate the risk/reward profile of this option?
The downside is that you lose $400. Just because the last transaction of that option was at $4 doesn't mean you can buy it at $4. Options are relatively illiquid.
That's an enormous time premium that you are paying. If you're a large holder then it might make sense as downside protection but otherwise I can't see the reason for it.
These are not new "dilutive" shares - the stock was always factored into the FB market cap so it's not like publicly traded shares are suddenly worth 60% less just because the float increases. But it does mean that for a while people who have been unable to sell are able to do so which is going to lead to some short term downward pressure. Once that is over Facebook will resume its normally trajectory, ummm, downward...
How did Facebook's IPO go so badly? (It's generally agreed upon that it went horrifically for Facebook and its shareholders, right?) Is it, in a very stylized way, Wall Street in just wanting to extract as much money as possible from a target and not really serving the interests of the client?
It went badly because a few groups had tried to inflate the stock for its IPO, and as soon as folks got their hands on financials that became apparent.
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.
People had unreasonable expectations because it was one of those Big Silicon Valley IPOs, which have traditionally paid off very well. I suspect that most people thought (without evidence) that Facebook had some magic revenue device up their sleeves. Perhaps Facebook also thought they would be given more time to produce on the investment.
A company's customers determine its value. Facebook's customers are advertisers, not stock purchasers.
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.
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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.
"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.
http://en.wikipedia.org/wiki/Tragedy_of_the_commons
https://en.wikipedia.org/wiki/The_Logic_of_Collective_Action
Besides, the Street made their money off of this deal a long time ago.
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.
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.
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?
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.