"Mr. Zuckerberg, sir. Sorry to bother you, but nobody wants to buy Facebook stock anymore."
All this year TechCrunch and others were covering the weekly SecondMarket auctions for Facebook stock. 2.7 million shares, for example, cleared in aggregate the first five auction at prices ranging from $21.01 to $28.26 per share.
The auctions have continued, but there haven’t been the dramatic price increases or decreases needed to trigger the rabid coverage. But today, for the first time I believe, SecondMarket was unable to clear any shares at all in the auction.
The weighted average offer price for this week’s auction was $33.91, roughly in line with the clearing price for last week’s auction. But the weighted average bid price was just $28.15. Zero shares cleared the market, meaning no shares changed hands.
Why? The WSJ article this week pouring cold water on rising startup valuations, and suggesting that venture cash was drying up, was almost certainly the cause. Whether or not there was much truth to the article, things like that can and do freak buyers out and cause them to step back. No one wants to buy at the top of the market.
What really matters is whether or not things pick back up next week or the week after. And whether or not sellers will take lower prices in the $20s to cash out of Facebook.
COMMENTARY: In a blog post dated October 6, 2011, I reported that SharesPost, another major secondary market broker specializing in sales of private company stocks, held an auction in early October and Facebook shares sold at a historic low of $32.10, valuing Facebook at only $77 billion.
In a blog post October 8, 2011, eMarketer forecasted a general slowdown in social media advertising revenues for 2011/2012, caused by a slowdown in the economy and overall reduction ad spending by brands. EMarketer, which tracks internet ad spending, also reduced its forecast of Facebook's ad revenue by 6.1% from the start of the year to $3.8 billion, down from $4 billion.
The above factors have no doubt contributed to the drop in Facebook's share price in the secondary market, and is not a good sign for many Facebook staffers who have planned to cashout their shares.
The drop in Facebook's share price in the secondary market points to a huge flaw in the auction pricing model used by secondary market brokers. Secondary market brokers have auctioned very small blocks of Facebook shares (generally about 25,000 shares) to create artificial scarcity and drive up the asking price of Facebook shares for months. This strategy worked well until now. Investors are apparently not willing to pay the asking price, and the secondary market brokers have pulled the shares off the market rather than to see the price deterioate by accepting lower prices.
I subscribe to both SharesPost and SecondMarket updates, and have placed a stock watch on both Facebook, Twitter, Zynga and foursquare to see what is going on with their share prices. Will let you know if anythuing major breaks.
Courtesy of an article dated October 14, 2011 appearing in Michael Arrington's UNCRUNCHED
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