Facebook, Strategy Session Post IPO. What Do You Do Now?

After Friday’s action on Facebook’s IPO, the press was merciless. Monday’s trading was probably predictable, but the question remains, “What do you do now?”

Well, let’s start with the model price chart.

Facebook with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of FB subsequent to this post will be maintained on Facebook, here.

You can see Friday’s price action on the noted price bar. You also can see, the close could not hold EBV+7 of $39.07.

What does the mean?

We are currently in the zone, where EBV+7 ($39.07) becomes resistance and EBV+6 ($28.98) becomes support. Where did these numbers come from? These numbers are based on our estimate of the pro forma balance sheet of Facebook post IPO. Fundamentals that are price specific, I know it’s hard to believe. Unfortunately technical analysis won’t help you in this case.

Some observations on my part.

1. Unlike any typical IPO, Facebook shares were being traded in a private marketplace. Bloomberg had been keeping track of these trades and price levels. We have included these price bars on our model price chart above. These trades were transacted at a higher price than the current market. (Monday’s Close $33.87). This suggests big supply, or overhand in the stock. This may take months to clear, depending on the holders of these private transactions. In other words, were the buyers hoping for a quick flip on the IPO or long-term holders of the position?

2. I believe everyone is “shocked” on the aftermarket of Facebook. This was supposed to be the bellwether. We, the public, have been hyped on Facebook since the movie “The Social Network”. To have this IPO fail is amazing. I would love to hear the behind the scene conversations on this. I’m sure there is finger pointing everywhere. Not to mention another piece of bad news for the investment banks. Morgan Stanley, lead underwriter, spent only a day supporting the stock price. Then what? Ran for the hills? J.P. Morgan, in the lead group, was it distracted trying to unwind some nefarious trades? (What is up with the investment banks anyhow? The market seems to be taking them apart. Future blog post)

3. Valuations on other social media will have to be scrutinized by investors. Shares like LinkedIn trade over EBV+8. If Facebook trades under EBV+7, LinkedIn should trade under $50 per share, if LinkedIn had the same valuation. And what about the lesser names like YELP, Groupon and Zenga. What about future social media IPO’s in general?

As I have written in the past I believe Facebook shares, under the price of $39 per share is good value for long-term investors. (Here)

So where does all this leave you?

Short-term I believe Facebook could fall to EBV+5, which is $18.25 per share. Again this is a probability. If investors are putting their hand out, catching the proverbial falling knife, or averaging down then you should know that Facebook could fall to this level. What is the probability? I would say 50/50.

Keep in mind Facebook will be in a quiet period by the SEC meaning Facebook cannot defend itself. Also, insiders’ can sell stock in 91 days after the IPO, which is called “lock up”. Yes, it seems that nothing but silence and more distribution will be facing investors short-term. Not to mention all the negative macro factors impacting the market on a daily basis – Europe.

So there you have it. Facebook was supposed to be a sure winner. Retail investors lined up in a market where they were cashing out of their equities. This event had turning point written all over it – both in terms of a bottom to this current correction and about the equity market in general. However Friday delivered bad news to all who participated – just what this market needed!

2 responses to “Facebook, Strategy Session Post IPO. What Do You Do Now?

  1. Ken May 25, 2012 at 2:20 pm

    Hi
    i am an avid follower on BNN and this site is great !
    Would you be so kind as to comment on ZAR.T model price
    is this the same issues as CPG where you have issues??
    your not on BNN enough and my questions never get through

    • ModelPrice Guy May 28, 2012 at 12:02 pm

      Thanks for the comment!
      Zargon (ZAR) pays a dividend of $1.20, with consensus earnings this year of $0.17 and $0.69 for 2013. Yes, this is the same issue as CPG. Notice how the EBV lines slope down, this means book value is falling. They are paying out capital instead of earnings. ZAR will have to do something soon though, solvency is getting low.

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