Like a car crash on the side of the road, one has to slow down and have a look. I have written a fair amount on Facebook since the start of this blog however; I continue to be amazed at what is going on here. Plus I also believe there is education value in reviewing a name that’s constantly in the news and possibly a product that readers have familiarity with.
First, we will start with last night’s 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.
Here is what I expected. Facebook shares would trade down to EBV+5, maybe trade under EBV+5 for a spell, say one trading day, and then the big POP! Pop being possibly a trade to EBV+6 or $34.54, before testing EBV+5 again sometime in the future. How would I know this? Experience. I have seen this millions of time so why not now? Well, there was a little bounce. I have to squint to see it on our model price chart. Then the day before yesterday, FB shares broke through EBV+5.
This is significant. Why?
EBV+5 is an important level for growth companies. The market gives this valuation to companies where growth is assured. Where companies return on capital is high. Where confidence in management, the product they have and returns are translated into even higher valuation down the road for future investors. So with Facebook shares breaking EBV+5, I hope my readers see why this is a big deal.
OK, so where are the shares going now?
Good question. EBV+4 is not a very strong level, but is a level never the less. (We color less influential EBV levels grey and more significant levels in color – more on this in a future blog post.) EBV+4 as of last night is $15.76. EBV+3 is $12.60, and is a very strong level and as you can see our calculated model price of $13.42. Which one could argue would be fundamental value.
A few other things to consider as well
1. FB needs what I call a “Capitulation Trade”. In this trade, everyone gives up. Those weak holders, margin players and traders/investors that have too big a position in FB in their accounts where real damage is occurring say enough! They usually say this all at the same time.
2. More Facebook shares will hit the market. On August 15, 268 million shares can hit the market. Another 247 million will be made available on October 14. And believe it or not 1.3 billion shares become available on November 13.
3. On the plus side, the government mandated “Quite Period” is over, at least. This means research houses, as well as the underwriters can issue research reports on Facebook to help investors, for those investors looking for help. As I look at earnings estimates, which we rely on for the calculation of model price, we have 30 analysts’ making estimates, which is very robust.
For what it’s worth and if EBV+5 doesn’t hold, I believe Facebook looks to be going to EBV+3 or $12.60. That is another 40% loss from last night’s close. Certainly at this level, EBV+3, Facebook would look very attractive from both a structural level (EBV+3) and our model price calculation. This will be interesting to watch and maybe a learning experience for those new to our model price work.