Breakout

Nasdaq 100 to Friend Facebook: Should You Too?

Breakout

Facebook (FB) officially joins the ranks of the tech elite tomorrow when it's added to the Nasdaq 100 (^NDX).

The widely watched index is comprised of the top 100 non-financial stocks by market cap that trade on the Nasdaq (^IXIC), including heavyweights like Apple (AAPL), Google (GOOG), Microsoft (MSFT) and Oracle (ORCL). With a $60+ billion market cap, Facebook replaces Infosys (INFY), which is moving to the New York Stock Exchange (NYX).

Facebook's inclusion is largely seen as a positive due to the popularity of the NDX among ETFs and mutual funds. "The question that has to be asked though, is that given the corporate governance practices in place at Facebook -- namely Zuckerberg's totalitarian control of the company and the ability to appoint his own successor and the risk that puts on minority shareholders -- are other indices like the S&P 500 going to follow suit?" asks David Garrity, principal at GVA Research. "That is very much an open question because there have been doubts raised about Facebook."

Facebook shares have seen plenty of ups and downs since the initial public offering on May 18. The stock debuted at $38 a share and was more than cut in half after a series of insider share lockup periods began expiring.

The first expiration in mid-August set off a downward spiral that took the stock to its all-time low of $17.55 on Sept. 4. Facebook has since recovered 55% from the low despite expirations in October and November that put a combined 1 billion shares on the market.

"On the positive side, we do have indications in the recent quarterly results that some of the issues people had with mobile and the transition of Internet advertising from desktops to mobile platforms is something that's finding its way toward resolution," says Garrity. "At the same time, we have major lockup expirations out of the way, but we're not out of the woods as far as IPO lockup expirations until May of next year."

Facebook has two more expiration dates: This Friday (156 million shares) and mid-May 2013. But the tide of confidence seems to be turning as investors focus on Facebook's ability to monetize mobile ads. The company's third-quarter earnings report highlighted a 300% rise in mobile ad revenue from the prior quarter, accounting for 14% of total revenue.

"One might argue it's a fundamental play in terms of the momentum of the shift towards mobile and the fact that Facebook, being a large enough property, is going to have the benefit of perhaps being seen more as a pure play on that [mobile] than other companies, like Google," says Garrity.

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