Facebook appears poised to crack above its $38 IPO price.
Shares continue to rally in the wake of last week’s blowout quarterly results. At last glance, the stock jumped as high as $37.66, leaving it within spitting distance of the price it went public on May 18, 2012.
Aside from Facebook’s trading debut, the social network hasn’t traded above its IPO price in its 14-month history as a publicly traded company.
Facebook last week reported a big earnings surprise, boosted by a surge in mobile and local ad sales. Analysts have been gushing optimistic remarks in the wake of the results, and shares have continued to push higher as investors have applauded Facebook’s ability to gain significant traction in mobile.
The roundabout route back to $38 has been a long time coming. Facebook shares fell by more than 30% in less than a month following the IPO and traded as low as $17.73 in September. Shortly after the stock hit bottom, CEO Mark Zuckerberg spoke at a conference — his first public remarks since the IPO — and was widely praised on Wall Street. Analysts said then Zuckerberg showed poise and vision, proving that the company had a long-term road map to monetize its mobile strategy.
On Tuesday, July 30, 2013, the stock gained $2.20 or +6.2% to $37.63 on more than three times its average daily trading volume (172.54 million shares traded hands vs. 50.92 million shares average volume).
Facebook Fails To Reach IPO Price of $38.00 on May 18, 2013
Shares have rallied in the wake of last week’s blowout quarterly results. A surge in mobile and local ads has Wall Street feeling better about Facebook’s future prospects. The stock is up 41% this year, with the bulk of the gains coming after last Wednesday’s earnings report.
In the short term, the rally got us wondering if there’s any technical resistance hanging around the $38 price that investors should be aware of. Considering $38 is not only a psychologically significant level, but also the break-even point for early investors who invested in the IPO, there’s plenty of attention surrounding it.
Mark Newton, chief technical analyst at Greywolf Execution Partners, said in a chat with MoneyBeat.
“Intra-day levels can have importance technically when approached after a meaningful time has elapsed. And often the longer the time, the more important the level becomes.”
In an email, Newton explained how the attention surrounding the $38 IPO price may impact trading over the short term:
"Resistance often times is created based more on psychological factors than any type of real fundamental factors. Those who are long stocks which have declined will often wait until they approach former levels where they bought, before selling the shares. So in this case, many who bought the stock between 38-45 on [May 18] often will sell into gains as they become “whole” with the mindset that “well, at least I got back what I paid for it, and am lucky, despite having ridden a big roller coaster down, and now back higher.
Technically oriented folks understand this logic also in terms of how important these levels are, and will sell as a stock approaches former highs, or in some cases some aggressive types might attempt to “SHORT” the stock, or use options to “write calls” against shares, knowing that these levels often can have some importance in causing at least some minor consolidation to the former rise. …
Former highs and also former lows often have importance, but of course if BREACHED, and in this case, if FB were to close meaningfully above $45, it could create a “breakout” type situation where those who had attempted to short the stock would then be forced to cover and/or others with screens pre-programmed to search for stocks hitting all-time highs, might be inclined to buy into the shares on a move to new high territory."
Facebook shares jumped as high as $37.96 on Tuesday, meaning Wall Street will have to wait at least one more day before the social network may be able to push through the highly anticipated $38 marker.
In a blog post dated July 27, 2013, I reported on Facebook's Q2 2013 earnings report conference call with Wall Street analysts. Facebook blew away Wall Street's Q2 2013 forecasts by a country mile. Facebook impressed investors by generating $656 million in mobile ad revenues, a new high for the company. This started a trading frenzy and Facebook stock rally.
But, I also cautioned investors not to celebrate too early. Although Facebook is successfully churning out higher mobile ad revenues, it should be borne in mind that back in Q2 2012, the company did not have any mobile ad revenues, so there is no benchmark to compare against.
All this excitement could come back to haunt Main Street investors. Facebook is not a long-term buy, but a short-term speculative stock. Institutional investors have been shorting FB shares everytime it hits a new high, and FB just hit a new high. I expect this trend to continue, so investors beware.
Institutional Investors Set The Pace
I do not have the number of shares held by institutional investors, but I firmly believe that a lot of them will cash most of their Facebook shares, or have already done so during this recent runup since the Q2 2013 earnings report came out. Many of them were just waiting for Facebook's Q2 2013 earnings report to come out, and they are now benefiting greatly. The number of shares that traded hands during the last four trading days far exceeded average daily volume for the previous 90 days by 3 to 7 times. Those are the institutional investors cashing out or meeting short positions.
Can Facebook Continue To Grow Mobile Ad Revenues?
The big questions is whether Facebook will continue to grow mobile ad revenue at this blistering growth rate. Most of the growth in mobile ad revenues is coming from the U.S. Average revenues per user overall were up for Q2 2013, but most of the gain was from the U.S. International average revenues per user are about one-fifth that in the U.S. This is the conumdrum that Facebook faces. This is the "revenue gap" that I have often referred to in previous blog posts. Mobile and desktop Facebook ad rates on a CPM basis are about one-fifth to one-third those of rates in the U.S. Simply increasing the number of mobile and desktop ads internationally will be insufficient to counter any slowdown in U.S. mobile or desktop ads.
Facebook Video Ads Could Boost Ad Revenues
During the Q2 2013 earnings report conference call, Sheryl Sandberg said that Facebook video ads were not ready for primetime just yet. I expect video ads in the news feed to happen late in Q3 2013. Facebook could have a huge 4th Quarter as more advertisers place video ads in the news feed.