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Whether Facebook executives sell their shares on Thursday is beside the point: Social media companies are facing big challenges. (Scott Eells/Bloomberg)
Whether Facebook executives sell their shares on Thursday is beside the point: Social media companies are facing big challenges. (Scott Eells/Bloomberg)


Facebook’s issues run much deeper than end of lockup Add to ...

Of all the things to worry about with Facebook Inc., the end of the so-called lockup period is far down on the list.

Agreed, the fact that high level executives will get the right to sell their shares starting this Thursday is a theoretical threat to the share price – as it was with Groupon Inc. near the start of the summer.

As Associated Press reported, 271 million Facebook shares could be put into play as executives Sheryl Sandberg and David Ebersman, along with Accel Partners, Goldman Sachs and Microsoft Corp., are given newfound freedom to do what they want with their holdings.

Consider it a warmup act. Come mid-November, founder and chief executive officer Mark Zuckerberg gets his turn to sell, giving investors another reason to fret: He owns a third of Facebook.

The what-if scenarios yield horrific thoughts: If these investors unloaded their 1.9 billion Facebook shares, or more than four-times the number of shares that are currently trading, the share price would collapse under the selling pressure.

Look what happened to Groupon. When its lockup period ended at the sart of June, the shares fell 8.9 per cent on exceptionally high volume.

That looks like a bad template. But consider that this was an awful day for the market in general: The S&P 500 fell 2.5 per cent, marking its worst one-day performace in 2012. It seems only natural that higher-risk social media stocks would take a particularly bad drubbing.

What’s more likely is that investors fear the end of Facebook’s lockup period because its shares – like most other social media stocks – have experienced something of a collapse already.

Facebook shares have fallen 45 per cent from their IPO price of $38 (U.S.), while Groupon and Zynga Inc. shares have fallen about 70 per cent each from their respective IPO prices.

On Tuesday, Groupon shares fell 27 per cent after reporting on Monday evening second-quarter revenue that missed expectations, even as they rose 45 per cent over last year.

Indeed, the end of the lockup period merely coincides with what has been a disastrous start for social media companies as publicly traded stocks – not necessarily because insiders are cashing out but because investors are now coming to terms with reality.

That is, maybe earnings are not growing at a rate that justifies – in the case of Facebook – a price-to-earnings ratio of 100.

Facebook has taken a lot of criticism for the way in which it conducted its IPO.

Yet, the sad performance of its share price only confirms much of what we already know about investing: Stocks that are priced to perfection tend to show imperfections, red-hot trendy sectors are home to many of the priciest stocks and new companies with unproven track records can be particularly volatile.

Perhaps Facebook insiders will take the opportunity on Thursday to sell some of their considerable holdings in the social media company.

But the fact that the share price is down seems to be a weak reason next to what look like far bigger threats to social media companies.

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