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No Facebook Pop as Company Concerns, Stock Market Weigh on Shares

The increased willingness to divest shares shows that insiders believe the risk/reward for continued investment is not overwhelmingly in their favor.

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 Facebook (FB) takes front and center stage today with its highly anticipated debut. We find it fairly surprising to see Facebook only up a few percentage points in initial trade given the amount of pent-up retail demand for its shares. Clearly concerns regarding the company's valuation, increased insider selling, and  General Motors (GM) news are weighing on the stock. Weakness in the stock market during the last several days is also likely playing a significant role.

We had a mixed reaction to the upsized offering size (the number of shares being sold by existing shareholders increased 53% and now constitutes 57% of total shares outstanding). We think Facebook insiders took advantage of the strong demand for Facebook shares, as they were able to sell an increased amount of stock without having a material impact on the IPO price. 

That being said, we think the increased willingness to divest shares shows that insiders believe the risk/reward for continued investment is not overwhelmingly in their favor. With would-be investors receiving a greater allocation of shares, demand for shares in the aftermarket is naturally less, which a likely playing a role in the less than spectacular Facebook debut.

This brings us to an often-discussed question: How will Facebook do in its first day, and what's the short-term trading strategy? We at Morningstar typically don't make short-term trading calls and instead take a long-term fundamentally based investment view, but we thought some historical reference may serve as a guide for those that wish to play Facebook. We've looked at seven recent high-profile technology IPOs that have varying ties to social media: LinkedIn (LNKD), Pandora (P), Groupon (GRPN),  Zynga (ZNGA), Yelp (YELP), Angie's List (ANGI), and Millennial Media (MM). The common thread is that while these stocks tend to balloon on the first day, a fair amount or air gets let on over the ensuing month and even more so over time. Furthermore, the more the stock pops on the first day, the more it typically corrects over ensuing time periods. Because Facebook didn't pop as expected, the odds for future gains seem to have gone up. However, we'd remind our readers that the stock still appears overvalued relative to our fair value estimate.

This report is courtesy of Morningstar Institutional Equity Research. For more information, click here.

James Krapfel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.