Monday, September 24, 2012

FB: Helter-skelter

I feel as though I should apologize for writing yet again about Facebook Inc. (FB). It is such a ridiculous stock, in its market behavior at least, that it challenges faith in the two great contradictory truisms of trading.

FB is neither the product of a rational market nor a random walk. Its market paradigm is helter-skelter. It is a panic set amidst a riot.

Barron's -- the influential Wall Street weekly -- in its most recent issue declared that FB's proper value is $15, or 24 times projected profits for 2013.

In true riotous fashion, FB gapped at the open down 3.9%, and then continued in that course, for an intra-day loss of an additional 4.9%.

To briefly review the chart, FB opened on IPO day, May 18, at $42.05, peaked at $45, and then quickly dropped to $25.52on June 6, recovered to $33.45 on June 22, declined again to a low of $17.55 on Sept. 4, and recovered to $23.37 on Sept. 19.

The moves have mainly come on news -- either stock sales by major holders or bashing by analysts or, most recently, a high-profile interview by CEO Mark Zuckerberg.

The Barron's gap is one of the first major moves to be based on fundamental analysis. Barron's argues that traditional web browser traffic to Facebook is declining, as people move their browsing to their iPhones, Android phones and other handheld devices.

Facebook, their argument goes, gets most of its revenue from traditional browsers, and hasn't yet figured out how to monetize the small screens of mobile devices.

Fair enough. Of course, the same could be said of Google, LinkedIn, Politico, Huffington Post, The New York Times -- any ad-based outfit that runs on the web. It is a fact that you can't fit advertising onto a small handheld screen the way you can on to a large browser screen running on a laptop or a desktop.

So the problem doesn't apply to Facebook alone. It applies to everyone.

The article also refers to Facebook's "potentially fickle" base. Well, yes. As is the readership of any site on the Internet. It goes with the territory. Just ask MySpace. Or Yahoo!. Or Lycos. Or AltaVista. Or Private Trader, for that matter.

Barron's, like many analysts, uses estimated earnings. I don't. As a charts dude, my theory is that the current price reflects not only present knowledge but expectations for the future. So some sort of estimate of unknown validity is redundant and of little value.

I trade based on what I know, not on guesses.

What I know is the FB has as price/earnings ratio of 127.62, based on a price of about $20.85 (as of this writing) and earnings for the past 12 months of 0.16 per share.

Let's make some comparisons.

LinkedIn (LNKD), the closest counterpart to FB, has a p/e of 1,050.36.

Google (GOOG), a maturing formerly hot IPO that is still in its innovative phase, has a p/e of 21.76.

Microsoft (MSFT), a fully mature older tech company, has a p/e of 15.59.

If Barron's analysis is correct, then it would lower FB's p/e ratio to 93.75, still on the high side compared to other tech giants, such as GOOG and MSFT but well below LNKD and FB's current p/e.

Barron's is proposing is a radical revision. Does it meet the test of reasonableness? I think the best way to make that test is to compare FB to a competitor, another young publicly-traded social networking company. That competitor is LNKD.

FB has 800 million subscribers from a target audience that potentially includes everyone in the world with Internet access. LNKD has 175 million subscribers from a target audience that is composed of professionals in business and government. (LNKD may have purely entertainment subscribers, of course, but

FB has $3.9 billion in cash. LNKD has $577 million in cash.

Question: Is it possible that FB can use that cash to quickly develop ways to monetize its mobile presence? Well, yes. Especially since the company's CEO said earlier this month, "We are a mobile company."

FB knows where its future lies. It has the commitment. It has the resources. Is there any reason to believe that FB won't find a way to make money off of the smartphone in your pocket or the tablet in your briefcase?

If the Barron's estimate were applied to LNKD, it would lower its price from $123.45 to $11.25, or minus 997%. The reduction in FB's value, in Barron's-world, is a mere 10.9% at today's low (so far).

So, the Barron's analysis really doesn't seem reasonable to me. It's the sort of thing that your aging uncle might come up with as you and he have a beer or two on a bright Saturday afternoon. You smile. You nod. You forget it.

But enough FB traders clearly are listening to their old uncles to have an impact on the price. And that makes trading difficult.

I can trade a rational market, because the prices will move in incremental ways. There will be black swans, but they'll be rare.

I can trade a random walk, using strategies that will help bend the odds in my favor. The random walk theory has no black swans, because it has no expectations.

I cannot trade a panic, where black swans flock every few weeks or months. I can only hold on and hope that the helter-skelter ends.

A note on the chart: In terms of Turtle Trading (you can read the rules here), FB remains in bull phase. It broke above the 20-day high of $21.41 on Sept. 13, with an entry level at close of $20.71. (The actual entry price, of course, would differ for each trader.)

The initial stop/loss would have been $18.68 -- the entry price minus twice the 20-day average true range -- and that has been superceded by the 10-day low, which presently stands at $18.85.

By the Turtle Trading rules, FB remains in bull phase until it drops below the 10-day low. In this context, bull phase according to the Turtle rules means to hold bullish positions but not to open new ones.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

No comments:

Post a Comment