Will Facebook Bulls Have the Last Laugh?

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Facebook (NASDAQ:FB) investors waited with bated breathe as the expiration of the next share lockup arrived. Restrictions lifted Wednesday on 804 million shares held by former employees and those who sold at the initial public offering. That’s the largest number of shares to become free for trading since the company went public in May, and nearly doubles the total available for trading, according to a regulatory filing.

Bans on sales are put in place to prevent shares from flooding the market immediately following an initial public offering. Restrictions on smaller numbers of shares were lifted in August and October, but the November expiration is the largest by far, and with Facebook trading at roughly half its value from its public debut, investors were concerned that the expiration would further depress shares prices. However, shares surged 12.59 percent into Wednesday’s close.

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The new lockup expiration may only present a “limited downside,” said Brian Wieser, an analyst at Pivotal Research Group, in a research note this week. That’s because currently low share prices will likely discourage most investors from selling, at least in the short term.

In an interview, Wieser added that, “While the number of shares is significant, the market should be capable of handling the trading that results from the lockup expirations.”

Two more rounds of expirations remain through May. Facebook will free up another 156 million shares for stockholders, excluding CEO Mark Zuckerberg, who sold in the IPO but has said he won’t sell again before September of next year. Altogether, that’s only a small fraction of what becomes available for trading Wednesday.

While the stock’s poor performance since its IPO has investors on edge, Wieser may be right not to place too much emphasis on Wednesday’s expiration. Selling now with shares near record lows has few advantages, especially since Facebook’s fortunes are just beginning to look up.

Most of Facebook’s money comes from advertising. Though second- and third-quarter growth was down from the first quarter this year, revenues continued to grow at a fair clip. Last month, Facebook reported sales rose 32 percent to $1.26 billion in the third quarter, matching second-quarter growth, and topping estimates of $1.23 billion as the company benefited from efforts to sell advertising on mobile devices. Though not the 45 percent growth seen in the first quarter, or the 55 percent in the fourth quarter of last year, 32 percent is nothing to be sneezed at, and if the company can continue to grow mobile advertising revenues, it could maintain that rate of growth in future quarters — perhaps even add to it.

While the short-term view may have a slight downside, Facebook investors taking a longer-term view, looking beyond the lockup expirations, will see a smoother road ahead. Future expirations will be much smaller and far less worrisome, and future earnings reports are likely to prove Facebook bulls right if the company continues efforts to monetize its mobile platform, where users are increasingly accessing the service.

Shares of Facebook (NASDAQ:FB) closed Wednesday at $22.25.

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