Will Facebook's IPO Smack Down Apple?
Apr 18th 2012 9:33AM
Updated Apr 18th 2012 9:34AM
The upcoming initial public offering of Facebook shares has attracted huge amounts of attention from the investing community. But some people will likely end up buying shares whether they like it or not, including the millions of investors who use index funds and ETFs to invest in the stock market -- and their influence can have a big impact not only on which stocks investors buy and sell, but also on the stocks that are members of those indexes.
Recently Nasdaq OMX Group (NAS: NDAQ) announced changes to its popular Nasdaq 100 index. Although one move to switch two companies may seem minor, another, more technical change in methodology appears designed to let Facebook into the index sooner than later. That in turn could result in behemoth Apple (NAS: AAPL) having less influence over the tech-heavy index than it currently has -- as well as scoring a coup for the Nasdaq over its rival, NYSE Euronext (NYS: NYX) .
Much ado about nothing?
One change that the Nasdaq is making is relatively routine. The exchange said that effective Monday, First Solar (NAS: FSLR) would no longer be part of the Nasdaq 100 as Texas Instruments (NAS: TXN) moves in to replace it.
That's a fairly typical rebalancing move for the Nasdaq that reflects changing market conditions. First Solar has seen its shares plunge as several trends, including falling subsidy payments and continued weak pricing for solar products, have conspired to weaken its business. By contrast, Texas Instruments has ridden the wave of the technology revolution to bolster its position as a major player in the semiconductor space. With a market cap of more than $37 billion, Texas Instruments almost certainly foresaw the likelihood of its joining the index when it made the switch from the NYSE last year.
The fight for Facebook
TI's market switch from the NYSE to the Nasdaq highlights the battle between the two exchanges as they battle to sign up lucrative listings. The biggest target currently on their radars is the Facebook IPO, which both exchanges clearly want for its rampant popularity and the attention the social-media company would bring the exchange it chooses to list on.
The Nasdaq's methodology change focused on the length of time that companies have to wait before becoming eligible to become members of the Nasdaq 100. Before the change, newly public companies had to wait two years before they could meet the index's criteria. But Nasdaq is cutting that requirement to just three months -- potentially allowing Facebook to join the Nasdaq 100 as early as this year, assuming its IPO goes off in the next few months.
What it means for Apple
If Facebook manages to reach and maintain a $100 billion market cap, then its eventual inclusion in the Nasdaq 100 will force a rebalancing downward of Apple's weighting in the index. Currently, Apple makes up about 17.5% of the PowerShares QQQ ETF. Facebook would likely get about a 3% to 4% weighting, which would have to come proportionally from Apple and the other members of the index.
On a percentage basis, therefore, Facebook's inclusion wouldn't cut Apple's influence that much. But with $33 billion under management, the PowerShares ETF is big enough that even small cuts could translate to a lot of forced selling of shares. Moreover, when you consider non-ETF money that tracks the Nasdaq 100, it could add to selling pressure if Facebook joins the index.
What to do
As influential as index funds and ETFs have become, their main impact is short-term in nature, especially when they have to buy or sell stocks based on index methodology changes. Once the change gets made, the component stocks reach a new equilibrium, and more fundamental aspects of the companies take precedence in their long-term results. So Apple owners probably shouldn't worry too much about the Nasdaq's moves.
But for Facebook, the consequences could be far greater. After Facebook's IPO, you'll want to keep an eye out for news about when it could potentially join indexes like the Nasdaq 100. With popular IPOs in the past, the resulting index-fund demand has made a big impression on shares.
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At the time this article was published Fool contributor Dan Caplinger likes a good smackdown. He doesn't own shares of the companies mentioned in this article. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, First Solar, and NYSE Euronext, as well as creating a bull call spread position in Apple and a ratio put spread position in PowerShares QQQ. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always stays in balance.
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