- Facebook was recently ranked as the 16th most held stock by institutional investors.
- The ranking is indicative of how bullish big money has become on Facebook.
- But there are two headwinds to big money that might limit Facebook's upside potential.
On the 4th of March, Eric Chemi announced on CNBC that Facebook (NASDAQ:FB) is now among the top 20 most widely held stocks. This is the first time that Facebook has made it on the top 20 list of the most held stocks among institutional equity investors.
Facebook surged from a ranking of 23rd in September and 35th at the end of the 2014 to 16th place according to data from eVestment provided to CNBC.com.
The list in the table above shows that Facebook is one of the most liked positions among institutional investors or big money. This is good because it shows that institutional investors have become increasingly bullish on Facebook.
However, Facebook's fame among institutional investors might limit the stock's ability to be defined as momentum stock. This is because there are compelling reasons that suggest that big money can deter Facebook's upside potential moving forward.
First, institutional investors limit upside potential because their turnover is quite low. To start with, institutional investors spend a lot of money and time to hire researchers to carry out in-depth analysis for them before they take positions. This time-consuming process required to take a position keeps them locked in for longer. In building positions, these investors buy shares held by other firms before they hit the market and typically hold them. This reduces the overall volume of shares traded. Meaning that even though investors are bullish on the stock, the low volume will not reflect the bullish sentiment in the market. This might send out weak bullish sentiments to the market even if the sentiments on Facebook are really high.
This tends to reduce volatility, which is good when investor confidence is high in the stock and institutional investor are still building positions. However, the risk is when institutional investors decide to close positions. This is because institutional investors collectively hold a lot of shares, when they decide to close positions, they can create overselling in the stock. This negatively affects firms because its stock price can suddenly decline, and once they decline, these stock prices have a hard time trying to climb back up again.
Second, the other problem is that portfolio managers are judged on a quarterly basis. Consequently, to achieve parity with major indexes and meet quarterly investor expectations, portfolio managers can close under-performing positions.
Further, Facebook might no longer be a momentum stock. Facebook has already captured ~66% of its Total Addressable Market or TAM. There are 3.174 billion worldwide internet users. Eliminating countries where Facebook is blocked, that number comes to ~2.415 billion people. Implying a slower growth rate ahead as the total number of customers remaining for Facebook to saturate its TAM is very low. This decline has already started to happen. The Monthly Active User (MAU) growth rate was 39% y/y in 2011, but it decreased to 14% y/y as of FY ended 2015. MAUs growth rates are poised to slump further to single-digit numbers as seen through the average growth rate extrapolation shown below. Also, as Facebook grows in size, it will soon become a mature company.
Lastly, I compiled Facebook's historical trading volume from Nasdaq as shown below. Notice that since 2012, the average trading volume has been slowly declining.
(Source: Authors Analysis with data taken from Nasdaq - Facebook's Historical Trading Volume)
When you look at Facebook's surge from $18.06/share on August 18th, 2012 to $113.05/share as of March 24, 2016, it is obvious that most early investors could have profited handsomely had they closed positions. However, big money is usually in for the long run and this might explain the continued decline in Facebook's trading volume while the company's stock price surged. Therefore, this could mean that Facebook's future trading volume might no longer be indicative of actual investor interest, because most institutional investors do not trade in and out of positions frequently. This low turnover can limit the volatility in the stock during good times and hence limit its upside potential.