I am lucky enough to be a father of three wonderful kids. One of the things that I learned early in the parenting journey was that the old “squeaky wheel gets oiled” rule cannot be applied when it comes to children. If you reward the shouting and pleading of a child by giving them what they want, then you just encourage more of the same behavior. In many ways, the same is true of certain stocks.
Facebook (FB) has been the demanding child of the market over the last year. The stock has been jumping up and down and begging us to look at it. A year ago, FB was trading at over $30, and then collapsed to a September 2012 low of $17.55. A bounce back then ensued, which saw a high of $32.50 before the rollercoaster ride resumed and the stock dropped to below $23 at the beginning of June. The net result is that, over a period when the S&P 500 has gained over 22%, FB has declined by over 21%.
You might expect that I, with a trading background, would have been all over FB during this time. I mean movement is movement, right? Big swings with serious intraday volatility are a trader’s dream aren’t they? Well, not always. The problem with Facebook is that the stock is incurably trendy, and has seemed to react to shifts in perception more than anything. Much of the momentum for the big swings in price has come from neither technical nor fundamental signals. Rather it seems that opinions of what the company should be doing have driven the action. Facebook should be concentrating more on mobile. Facebook should be concentrating on revenue maximization. Facebook should take care of its image rather than just worry about money…etc. etc.
Whether it is because I am old and out of touch, or because I am just too busy staring at charts all day, these sudden, TMZ type shifts in popularity are totally unpredictable to me. I think they are born of a “once bitten, twice shy” attitude by traders and investors when it comes to social media stocks. The sector has started to resemble the tech sector of the 1990’s as Groupon (GRPN), Zynga (ZNGA) and the like have issued stock at the top of their popularity, but before they established a reliable revenue stream; great for the founders and private owners, but for the initial public investors, not so much.
What the 1990’s showed us, however, is that, where management is smart enough and can find revenue where none existed before, success is possible; witness Google (GOOG). As revenues climb at Facebook it could be argued that they have potential to do the same as the search giant; grow their core business to such an extent that expansion into other areas of technology is possible.
Revenues are certainly on an upward path, and that trend is expected to continue when FB release their Q2 2013 results after the close on July 24th. Goldman Sachs, for example, is predicting advertising revenue to show 43% year on year growth, and 14% quarter on quarter. Overall, the consensus suggests EPS of $0.14 on revenue just over $1.6 Billion. Those that questioned FB’s commitment to the mobile market or their ability to generate significant revenues from a social networking site have gone very quiet.
Given all of that, the chart for the last few months is interesting.
Over the last month, volatility has been reduced, even as the market in general has seen some swings, and a solid upward channel has formed off of the lows.
It would seem, then that FB has grown up. This new, slightly more mature version is much more appealing to me. At least going forward we can anticipate future moves being based on what the company actually does, rather than what prevailing public opinion thinks they should be doing. This new found maturity and respect for fundamentals makes the stock a much more viable proposition for long term investors. Now that the stock has stopped jumping up and down, I am prepared to give it some attention.