Thursday, August 30, 2012

Facebook Longs Getting Zuckered

Already down over 47% since the IPO, shares of Facebook (FB) had been trading lower ahead of the August 16th lockup expiration - and that trend continued on expiration day itself.
As Jon Najarian (who is even long the stock and looking for mid-twenties short-term) of pointed out: "The single biggest thing it might do is make it less expensive to be short Facebook."
I agree in the sense that many of the shorts were way ahead of the lockout and held short all the way down into the teens - so they'll cover now and on the way up as longs jump in on perceived value. So, yes, we could see a short term bump, but I worry about the rest of the year. The market doesn't care what your IPO was or what percentage hair-cut your stock has taken already - it will find a home. Take a look at the November at the money ($20) put options below:
A lot of volume. November options are extremely important because:
  1. Oct. 25th earnings are reported right after October options expiration. Yes, Zuckerberg says he does not manage to please the street every quarter. But, the market does react to quarterly reporting. For example, Facebook's first quarter seemed OK on the surface: They met estimates, sure, but once investors combed over the details and language, the stock sold off 10%. An important issue raised in guidance was the outlook on mobile advertising strategy and revenue. I use the iPhone and have never used FB's mobile app. It is so important that by November, there is some sort of guidance about mobile. Who is going to click on ads? Probably the same people that buy eCoins on DrawSomething - no one!
  2. The second lockup expiration of 1.2B shares is November 14th. Will Mark Zuckerberg sell any portion of his shares? Will other big institutions and partners like Zynga (ZNGA) sell? Their cost basis is plenty low enough to. I realize Microsoft (MSFT) already says they are holding their 25M shares here - but how long will Ballmer be content?
  3. Some other obvious answers - The macroeconomic picture and general market sentiment, including QE3 prospects and the presidential election. I would say to simply look at the social media "sector" as a whole in the last three months, around the time of Facebook's IPO. Stocks like the aforementioned Zynga is down over 63% in the last three months, Groupon (GRPN) is off around 61% while Pandora (P) shrugged off about 14%. Each of these are now trading in single-digits. To avoid a similar fate, Facebook will have to figure out what LinkedIn (LNKD) is doing right and try to emulate certain things.
Are you truly bullish and contrarian? If you are willing to buy here, why not start writing those Nov $17 puts and collect a nice $1.25. What about the bears? You could definitely try a Bear-Put spread in a nice little range should FB not break $26-$27 on the upside, in my opinion.
My sentiment is slightly bearish, but with little conviction: I found today's news really interesting, but have no plans on going either way with this. Maybe if we fall below $10, Zuckerberg will use his own money and take it private again. Sidelines are OK for me and many others for the moment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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