Facebook: Huge Long Term Potential

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Source: freestockcharts.com

INTRODUCTION

There is so much speculation about Facebook (FB) with the earnings announcement approaching, I felt compelled to issue a blog focusing entirely on Facebook. First, let's be clear, ALL of these articles across the entire Web, from even the most seasoned, veteran investors are merely opinions. You, as the reader, must decide not necessarily if you agree entirely with one "expert" over another, but if you can take away some good points from their article. This collection of varying points-of-view and tidbits of factual information you compile should aide you in choosing whether to initiate a position. I respect all opinions, even if I may not agree I can usually find something to take away. I urge you to NEVER initiate a position long or short based on one person's opinion. Back up a well written article with your own research. After all, it is your money! I hope to give you my thoughts in a clear and concise article, stating the facts where they are available and provide the best analysis when clear cut facts are not available.

I will give a brief, written history of the stock price's movement. Then I will present an original chart dissection representing my view of key time periods in the price movement. I will explain why I feel the stock moved the way it did, present support/resistance lines and trends. Finally, I will present my view on a good entry point, stop loss, price movement for earnings, shortly after earnings and long term.

To ensure I do not waste anyone's time who happens to be a diehard Short of this stock, this article is to be considered a bullish opinion. I also want it to be known that I never have a position in a stock I am currently researching. I feel this would cloud my judgment and pressure me to arrive at an opinion which would reflect my position.

BRIEF FACEBOOK HISTORY (Very Brief as a Public Company!):

Facebook went public on May 18, 2012 (That is less than a year for those with a calendar nearby!) It opened at a price of $42.05, had a high of $45.00 and closed at a deflated $38.23 with total shares traded of 573,000,000. Prior to Initial Public Offering (IPO) release, FB disclosed that more and more users were accessing their service via a mobile device. This could mean (and did) that advertising revenue would suffer. In fact this is a direct quote from the sixth amendment on page 14, "We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven"(techcrunch.com/2012/05/09/facebook-amends-ipo-s-1-to-admit-advertising-biz-hurt-by-increasing-shift-to-mobile/). Wow. So, why would anyone put a dime into the IPO if this caveat was disclosed ahead of time? Well, for informed investors, they realized this is merely called "risk". The fact that it became public knowledge and not just speculation before the IPO made the risk tangible and manageable. Informed investors could factor the revealed information into their decision on whether to initiate a position and at what price. Uninformed, retail investors just wanted to be part of the most hyped IPO in recent memory and had visions of huge returns on Day 1. I argue that the IPO fell in price on Day 1 because it became apparent to the masses that FB had no real, reliable earnings powerhouse. What made the matter worse was the revelation that their potential revenue stream was difficult, if not impossible, to extrapolate with even the most complex algorithms. I argue that it had little to do with the inflated P/E relative to other tech juggernauts (I also argue the high P/E today will not affect FB in the short term because price appreciation is based on the potential of FB and not fundamentals). The market hates uncertainty and companies with share prices based on hope ALWAYS fall eventually. Now when in history has speculation grown to the point that a tremendous selloff ensues when the masses realize the truth?? Another post, for another day.

*Did I just refute my own stance that FB trades mainly on potential and that all stocks which trade on hope will get crushed eventually? No, my argument is that FB will meet their potential and thus not get crushed long term.

The price fell to a low of $17.55 on September 4, 2012. To begin my research I separated FB stock chart down into six blocks of time, with the sixth block being the current, incomplete block. I attempted to marry price appreciation/decline with significant volume, to a revelation about FB. I argue that the stock price's depreciation to the September 4th low is directly related to the fear of employee's selling their restricted stock once their restrictions expired. I argue that nearly all the drops in price for this stock can be attributed to this fear. I argue that the decline was/is NOT related to uncertainty in revenue generation. Let me explain my reason by taking each block of time and analyzing the reasons and key dates.

*Please use the chart provided for all references made in this section. If need be, use Freestockcharts.com to view an interactive chart (the chart will not have my blocks of time but one can clearly see PPS, dates and volume).

"BLOCKS OF TIME"

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Source: freestockcharts.com

TIME BLOCKS DISSECTED

THE FIRST BLOCK OF TIME

This block of time is from IPO until a support level is found at roughly $26.15 on June 7, 2012. The market established this price point as the value where all unknowns about FB stock were manifested. Such as:

1) It had become clear that FB was not going to be a homerun out of the gate.

2) It was evident there would be difficulties projecting FB revenue growth, especially from mobile applications. Perception was revenue would be flat or decline slightly.

3) It was also clear that the P/E ratio was too high compared to proven tech giants AAPL, GOOG and others.

4) It was obvious that a large number of employee restricted stock was going to be available in the open market in the near future and that no one could predict who would sell and how much.

So, the market conceded that this was the price point, IF a majority of the employees held their shares, which would be the true bottom value. All of the risks were now on the proverbial table, so to speak. My chart shows a blue, horizontal line stretching the length of the chart. This line represents this "true" value point of $26.15 and I argue it forms an important support line.

THE SECOND BLOCK OF TIME

The second block of time covers from June 7, 2012 until the first earnings date on July 26, 2012. I have concluded that this price ascension was due to investor's hope in a slim chance FB would post their first earnings report ahead of speculation. When this didn't happen, the only major unknown of the stock (lock up expiry) took over and the emotional market created downward price pressure.

THE THIRD BLOCK OF TIME

The third block of time covers from July 27, 2012 to September 4, 2012. On September 4th, CEO Zuckerberg announced he would not sell his shares for at least a year money.cnn.com/2012/09/04/technology/zuckerberg-facebook-stock/index.html. His decision not to sell his shares was crucial to stop the bleeding. And the announcement did stop the bleeding, in a major way, as the chart indicates.

THE FOURTH BLOCK OF TIME

The fourth block of time covers from September 4, 2012 to the October 24, 2012 earnings date. Prior to the earnings date, on September 12, a large gap up occurred due to a talk given by Zuckerberg asserting that FB employees should "double down" on the future and that he was not selling his stake. Twice in the month of September, strong support from the CEO pushed the stock higher, proving he is the main shareholder the market is worried about. Again, this supports my point that earnings reports do not mean as much to the market as the potential sell off of employee shares. PPS started to fall back again with another expiry date looming on November 13, the biggest of all (www.reboilroom.com/2012/08/facebook-lockup-expiry-calandar.html). The earnings did not provide any real shockers and this pleased the market sending the stock price as high as $24.25.

THE FIFTH BLOCK OF TIME

This block covers from the October 24 earnings date to the expiry date of November 13. Notice how the stock retreated from its surge due to earnings being as expected. The reason for the retreat is obvious and AGAIN supports the assertion that the market will hold the stock down until it is satisfied the risk of employee sell off is substantially gone. The stock jumped more than 12% when it became clear that most of the restricted stockholders were not going to sell.

FROM LAST MAJOR LOCK UP EXPIRY TO PRESENT

This block of time can be summed up in saying simply this: Nearly 40% price appreciation. WOW. Let's look at this a bit closer. This is a nearly flawless run up to its current price ($31.08 as of 1/24/13) with only a few hiccups. One being the recent drop after the "social search" announcement. My opinion is that the market was looking for the big announcement to be something tangible or at least more commerce oriented. The fact is the feature is being beta tested and the CEO made that abundantly clear. The market overacted as it does so often (which usually creates buying or selling opportunities). This is one thing I like about the CEO, he is truly concerned about the quality of his product. However, this leads some to believe he doesn't care much about generating revenue. I find that to be absurd. Mr. Zuckerberg stands to lose more than all of us retail investors combined. He has already lost more than all of use combined! Yet, he is not panicking. That is bullish news to me.

It is clear to see that the majority of major pullbacks in price for FB have been directly related to the expiry calendar and NOT concern over revenue generation. It is clear to see that the CEO is firmly behind growing the user base and revenue, especially in the mobile market. In fact he stated on September 11, 2012, "…that the company would figure out numerous ways to profit from the growing number of its 955 million worldwide users who visit is online hangout through mobile applications instead of Web browsers on desktop computers"(finance.yahoo.com/news/zuckerberg-ready-double-down-facebook-025241568--finance.html).

CURRENT TREND LINES IN PURPLE

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Source: freestockcharts.com

PREDICTIONS FROM HERE FORWARD INCLUDING EARNINGS DATE

To begin this final section of the article I would first like establish some definite trends, support and resistance lines as well as suggest where future lines may materialize. I have attached charts and a table for visual aide. The "true" value line is the bottom value for FB stock and becomes key support should everything fall apart. It is approximately $26.15. The current support line FB is trading above was established on the third day of trading and initially was a support to stop the massive losses. The support line is roughly $30.94. Now a good rule of thumb is that support and resistance lines and trend lines should touch exact price points on at least three places along a line. I concede that this may have been true before the advent of the day trader and certainly before computers placed automatic trades. The reason I say this is because the last few minutes of every day, day traders are trying to unload their positions (long or short). This can lead to trades being placed at inflated or deflated prices depending on the situation during the last few minutes of the trading day for the stock. The flurry of activity could raise or lower the price as if huge demand on the bid or ask were real instead of artificial. So, the actual support or resistance is usually somewhere within the range of some pennies on a stock priced at this level. Having said all this, the lines I refer to will be listed in the table provided with dates having corresponding prices (either open, high, low or close) related to the line in question.

"True" Value Support

Date
Price
TIme
6/7/2012
$26.15
Low
6/6/2012
$26.07
Open
6/6/2012
$26.07
Open
11/27/2012
$26.15
Close
11/29/2012
$26.16
Low
12/21/2012
$26.12
Low
12/24/2012
$26.20
Low
12/27/2012
$26.05
Close
12/31/2012
$26.11
Low

Current Support Line

Date
Price
Time
5/22/2012
$30.94
Low
6/28/2012
$30.90
Low
7/5/2012
$31.02
Low
7/11/2012
$30.97
Close
7/13/2012
$31.02
Open
1/14/2013
$30.95
Close
1/22/2013
$30.89
High

Previous Resistance LIne

Date
Price
Time
5/24/2012
$33.03
Close
5/25/2012
$32.95
High
6/22/2012
$33.05
Close
6/23/2012
$33.02
High
6/26/2012
$33.10
Close

*Note: All prices are within $.10 of each other in each table. This is not by accident.

CHART SHOWING SUPPORT/RESISTANCE AND TREND LINES BASED ON PROVIDED TABLES

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Source: freestockcharts.com

COMMENTS/PREDICTIONS BASED ON CHART

The current trend is up for FB in the last block of time we discussed earlier. I chart I supplied earlier indicates where I think the trend line from that time should be drawn (in purple). They are included again on the chart above.

*Note: People will have a plethora of opinions on where these lines could be drawn, but in an instance like this the key is to see the upward progression of price. The ultimate establishment of a stop loss, should you initiate a position, should be carefully studied by YOU regardless of what I or anyone else says.

Based upon all the written information I have covered, the tables provided for support and resistance lines and all the supplied charts, I predict a continued upward move for FB. When I typed this article on (1/25/13, 2:00PM ET), A good entry point would have been around $31.00. However, since then the stock has been upgraded and a good entry now will be anything under $32.00. Earnings will be positive (because there won't be any huge swings up or down in revenue) and the stock price will appreciate towards $33.03. There should be about a 5-6% increase depending on the price at earnings day and could push through $33.03 resistance easily. The stock will pull back towards the support line (which is now currently the resistance line of the current trend) and trade in a predictable, upward trend testing the $36.65 resistance. This $36.65 was the opening price on the stock's second day of trading. The stock will push against this resistance for a few weeks more than likely before breaking through. It should approach $40 by end of summer, but remember, Mr. Zuckerberg put his guarantee at no sales for a year. He said that on September 4, 2012. There will also be a slight pullback around May 17, 2013 as the last lock up expires. This may be a good opportunity to add more shares or to scalp a quick 3-5% on buying the dip and selling on the test of the previous share price.

CONCLUSIONS

This stock is going to be a monster over the next year and further. After May 17, 2013, there will be no more market fear regarding lock up expiries. These five or so months should give FB enough time to get through the beta testing of their social search and peg a process to monetize the idea. (My opinion is they already have an idea on how to accomplish this, but they want to make sure the user response related to ease of use is acceptable first.) Shaky results of the social search monetization would push the price lower but those results shouldn't be out for 5-6 months or so. And I think the downward pressure will be short live because FB has the most potential of any stock in recent memory. They have 1 billion accounts, give or take, and a brand that is recognizable by 33% of the world's population (I say this because even those who don't utilize FB in developed countries know the name). So, if you are betting against FB then your bet is that some of the brightest minds in the United States won't be able to figure out how to monetize the attention of 1 billion users. That would be the most epic fail in business history. There are too many avenues they could go. Even though Mr. Zuckerberg says he isn't interested in issuing phones or tablets, don't count that idea out. Zuckerberg said this, ""I would rather be in a cycle where people underestimate us because I'd rather be underestimated," Zuckerberg said Tuesday. "I think it gives us the latitude to go out and make some big bets" finance.yahoo.com/news/zuckerberg-ready-double-down-facebook-025241568--finance.html. Big bets? Like what? The social search was not a big bet. I see that as a mere extension of the service. Now what they do to monetize the search may be a big bet. A description of a big bet to me would be to figure out how to have different levels of FB. Say a bronze (current, regular FB) at no cost, silver $9.99 with certain perks, gold at $19.99 with even better perks? THAT would be a big bet. Think about the annual revenue generation! Or what about using the huge account base as a buying group to get huge leverage in the marketplace (discounts at various retailers with a "Facebook Card") and there would be an annual fee for the card (a more direct form of advertising). THAT would be a big bet. (Think people wouldn't pay for a card? Ask a Sam's Club or Costco member.) I am merely throwing out ideas off the top of my head. Think about getting an entire team of extremely intelligent people together where their job is to do nothing but come up with ideas to monetize the huge account base. It may not happen this year, but it is going to happen. When it does, the amount of revenue FB can generate will be astronomical.

CONDENSED CONCLUSIONS

Opinion: Bullish

Entry Point: $32.00ish

Stop Loss: $29.49 (a tick below a close level of support SEE STOP LOSS CHART BELOW)

STOP LOSS SHOWN

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Source: freestockcharts.com

Earnings Prediction: Stock Price +5-6% initially (will fall back to test new support)

30-60 days: Test above $33.03 but below $36.65

By year end (possibly end of summer): $40-42.00

IMPORTANT NOTE: I have no position in FB. I do plan to initiate a position at my suggested entry point prior to earnings.

Private questions/comments are also welcome: investingsimply@yahoo.com.

 Last updated on January 29, 2013

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