Facebook – Important Break Out from EBV+5
November 22, 2012
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The last blog I have written about Facebook was on August 9, 2012 – here. Facebook’s stock price had broken or had a negative transit of EBV+5. As I stated in this blog I was quite surprised by this move in Facebook shares. See EBV+5 is an important level, according to our theory of model price. This level separates companies that the market supports in terms of valuation over the production process of the company itself. Companies that trade below EBV+5 are companies where the production process, producing earnings, dividends and solvency, are dominate or the value of the “exchange process” is less than the value of the production process. If there were any company listed anywhere, Facebook certainly would qualify as a company where the valuation process would out weigh the production process – if one were to believe all the hoopla surrounding this company. With the negative transit of EBV+5, the market provided us with a head scratcher in terms of what this company was or is. Is Facebook a company of the future or isn’t it.
The other item I noted was the “lock up” of Facebook shares potentially hitting the market. On August 15, 268 million shares were released for possible sale, another 247 million were available on October 14 and 1.3 billion shares were available on November 13. Yes, these dates have now pasted, and investors seem to be relieved the shares of Facebook didn’t collapse under the weight of potentially selling shareholders.
Here is our Model Price chart of Facebook as at the close of trading Wednesday, November 22, 2012.
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.
Since my August 9, blog, Facebook has tried to emerge above EBV+5 on three separate occasions. To me this is analogous to holding a beach ball underwater. Over a period of weeks, every time the stock of Facebook tried to transit above EBV+5, the market knocked the stock back under. The fight as you can see has been an epic battle of supply and demand coming into balance with the IPO including the “lock up” shares noted above.
It looks like Facebook, with this current positive transit and “lock up” supply of shares now behind it; investors are finally tipping the balance in favor of higher stock prices ahead. I do believe the hype and potential of Facebook – how can a company with a billion users not have economic potential in the foreseeable future – which means this company should be trading at least at EBV+5 and beyond.