SAN FRANCISCO (MarketWatch) — Facebook Inc. slumped to a record low on Friday after a pair of brokers slashed their price targets on the stock, citing the combined weight of massive share lockups as well as signs of a weakening advertising business at the social network.
In morning trades, Facebook (US:FB) shares fell more than 4% to $18.31. This represented an all-time low for a stock that has steadily been losing ground since its high-profile IPO in May, with the company’s market value now less than half the level set by its debut price of $38 per share.
More than 24 million shares had traded hands in the first hour of trading, compared to the stock’s three-month daily average of 36.8 million.
Report History: Facebook Shares melt to half.
Bank of America Merrill Lynch and BMO Capital Markets both cut their price targets on Facebook. Stifel Nicolaus does not have a price target on the stock, but trimmed its forecast for the company’s 2013 fiscal year.
“Although valuation appears tempting, the uncertainty of the earnings trajectory and increasing public float leaves us cautious,” wrote Stifel’s Jordan Rohan in a note to clients.
A major issue weighing on Facebook at present is the expiration of post-IPO share lockups. About 271 million shares were released in mid-August, while more than 1.3 billion shares will become available for trading by mid-November. This will significantly increase the size of the company’s share float, with investors worried that the influx will push down the stock’s price if insiders like early investors and employees rush to sell their shares.
“Facebook has multiple lock-up expirations over the next year, and recent selling activity on the August lock-up suggests to us the risk of future selling pressure,” wrote Bank of America’s Justin Post.
Pointing to the mid-November lockup expiration that will release about 1.2 billion shares, Post said: “We wouldn’t expect the stock to see buying momentum until December.”
Daniel Salmon of BMO cut his price target to $15 from $25, and said the lockup was one factor, but also cited weakness in the company’s advertising business.
“Checks on paid media spending remain mixed; many conversations referenced a ‘pause’ in order to reevaluate earned/owned/paid mix and ROI [return on investment] measurement,” he wrote, adding that another risk factor is “continued industry pricing pressure.”
Salmon, who has an underperform rating on the stock, said that investor sentiment “is now much worse” than sentiment among advertisers for Facebook, but that focus will return to the company’s business fundamentals “after the technical challenges presented by lock-up expirations over the next six months have been absorbed by the stock (possibly offset by some index buying at some point).”
Bank of America’s Post kept a neutral view on the shares, cutting his target to $23 from $35. He noted “opportunities for new ad formats” that could help the company improve its advertising business, but expects continued pressure for the rest of this year.
Stifel’s Rohan said Facebook’s platform “has huge potential,” but still faces “significant” challenges with monetization.
“We believe the period of indigestion may continue as more shares come to market, limiting the positive reaction to growth initiatives,” he wrote, keeping his hold rating on the stock.
Edited By Cen Fox Post Team
