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Facebook Update


Given the big selloff in Facebook today, I’ve gotten a couple of emails from people curious about what is happening.

We don’t own FB in managed accounts, so I don’t follow it daily, but looking at the chart I got interested in what was happening.

In the graph above, I’ve added two indicators that might help us to figure out what is happening from a technical standpoint. Further on, I will give you some of the fundamental analysis.

From a technical standpoint, you can see that I’ve added blue Fibonacci Retracement lines based upon the high price on the day it came public around $45 and the low a bit below $17.50. You can see that FB was not able to hold the 50% retracement level inspite of two attempts by the bulls to do so. That lack of conviction by bullish investors brought us back down to the price level where most of the purchases and sales have occurred. You can tell that by looking at the large red/green bar on the left side of the chart – it represents the Volume By Price and is far larger than the other bars.

The 50% retracement level is an important psychological level for any stock that has had a significant run, either up or down in price. For a company like FB that ran down in price, you want to see it break above that 50% level and hold there, consolidating the move, then move higher toward the 61.8% level [ if you want to learn more about Fibonacci Retracements you can follow this link to Chart School ].

The Volume By Price bars along the left side of the graph show you that the buying volume (the green portion of the bar) is pretty close to balanced with the selling volume (the red portion of the bar) in that large bar. You can see how the stock price bounced around within that bar for about a month, but has moved to the downside.

The bars below that level are much smaller and predominantly green until you get down to the $21 level. That is a big concern as there were more buyers than sellers at lower prices – and some (potentially many) of those buyers will likely be trying to sell their FB to lock in a profit before FB drops in price any further, turning their profit into a loss.

When you get below the $21 level, you can see that there are more sellers than buyers (the bars are more red than green) so that is likely where bullish buyers will step in to accumulate shares.

So, from a purely technical standpoint, I see more near-term downside to the stock based upon the previous distribution of buyers and sellers – absent something fundamental happening or some sort of analyst upgrade coming out to turn sentiment positive.

From a fundamental standpoint, I’ve added my Key Statistics grid (see the blog post a few days ago on Google for more information on why there are key pieces of information for me).

FB Key Statistics

What you can see here is that the numbers look ugly – however, that is not uncommon for a young company like FB. Investors in FB see it for what it could be in the future, not necessarily where it is now. So, applying the same ratio analysis to it that I use for a company like Google does not make sense.

Let’s check out the comparatives:

FB Comparisons

The most striking thing about the comparisons that I see are the growth numbers – sales growth has been instrumental in making this company ubiquitous with the internet. Very few companies can say that they have grown in the same manner as FB. Their key for the future will be finding a way to monetize their users so that their shareholders can benefit from their operations.

Because the company has negative Free Cash Flow, none of my standard valuation measures can be used to obtain a value for the company. The closest I can give you is to tell you the enterprise value (the sum of the value of the equity and the debt for the firm) is $33.46 per share, which is pretty close to the consensus price target that the analysts have placed on it, $33.28 – maybe they also used enterprise value to calculate a target, I have no way of knowing.

So, in summary, if you are an investor in Facebook, you own this company for the potential you see in it several years down the road – you likely see it as the go-to communication platform that will over time fundamentally change everyone’s internet experience (not unlike how consumers transitioned from radio to television as their primary entertainment source) – and that FB will find a way to monetize that macro experience so that their shareholders will profit.

Near-term, the sentiment appears to have shifted on FB and we could easily see continued price weakness – but with a high profile company like this, any sort of positive news can shift sentiment on a dime and push the price back to the 50% retracement level.

I do not see us adding this company to our managed accounts anytime soon – we need to see that the fundamentals are clicking and that it is generating sufficient free cash flow to warrant a purchase.

However, for aggressive investors or for investors with a vision of what the company will become and who have a sufficiently long time frame to hold the stock while they figure out how to monetize their business – this could be a homerun investment.

Remember, IBM started out as a much different company than it is today, and it hit an all-time high within the past few days. Nothing says that can’t happen with FB in the course of time, and make the early investors – even those who bought it much higher than today’s price – a significant amount of money.

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