February 9, 2012: 2:14pm EST – Facebook stock prices on private secondary markets have soared to a post-IPO filing high of $44/share yesterday. This is despite the S-1 Filing revealing a 2011 total revenue figure of $3.711 billion, far below analyst expectations of $4.3 to 5 billion. In the first post-S1 filing secondary market trading, Facebook stock jumped to a $40/share high followed by a second, sequential jump to $44 yesterday, placing the implied valuation of Facebook above $100 billion for the first time, with a valuation of $103 billion according to PrivCo calculations.
PrivCo, the private company financial data authority, has analyzed the secondary market trading of Facebook stock and outlines the 4 main reasons for this spike in secondary market trading activity in Facebook:
1. No Lockup
According to SEC regulations, employees of a recently IPO’d company cannot trade the company’s stock until 6 months after the company begins trading in the market. This 6 month “lock up” period is to prevent employees (assumed to have insider information about the internal workings of the company not immediately apparent to public investors) from immediately unloading their stock. The spike in secondary market trading may indicate some Facebook employees are unloading at least a small percentage of their shares now in preparation for the 6 month lockup period after Facebook goes public.
2. The “Flipper” Factor
The spike in secondary market price is also an indicator that outside traders may be swarming in for a quick profit once Facebook pops as expected in its first day of public stock trading. The buyers can immediately sell their shares the moment Facebook goes public. As the recent Groupon, Zynga, and Angie’s List IPOs have indicated, even if the company has questionable business models, the IPO will still “pop” at least 50% in initial trading before settling back down to more reasonable valuations. These “flippers” are therefore counting on selling their shares right at this upswing to make a small profit with very little risk.
3. Looming Capital Gains Tax Increase
The US short and long term capital gains tax will increase roughly 5% across the board beginning in 2013. This puts a time crunch on Facebook’s IPO: Facebook must go public in May. This would allow Facebook employees to trade their stock once the 180 day lock up expires in November or December and allow them to squeak by before the lower tax rate expires Dec. 31st. Were Facebook to delay its IPO, or in the event of a lock-up period extension in connection with a follow-on offering (similar to LinkedIn's), selling shares in the secondary market now would ensure liquidity upon Facebook's IPO at the lower rate, potentially saving millions in taxes. With new shares becoming available as a result, larger block purchases by institutional investors are now possible.
4. Illiquidity Discount Rapidly Narrowing
As Facebook nears its IPO date, the illiquidity discount of holding Facebook Secondary Market shares rapidly narrows and will approach the expected offering price.
The lofty $44/share stock price gives Facebook a staggering $103 billion valuation (based on PrivCo calculations of 2.35 billion shares outstanding on a fully diluted basis). PrivCo analysis, however, reveals this spike in secondary market trading is based on several factors not necessary based on Facebook's fundamentals. In addition, the relatively small volume of trading will be dwarfed by the size of the imminent offering, measured in the billions of dollars of stock placed, rather than the millions involved in secondary market auctions. Even so, the ever-increasing value in Facebook shares on secondary markets will be weighed by lead underwriter Morgan Stanley in setting the final IPO price, expected in May.