The struggles Facebook (FB) has faced since its IPO are have been well-documented. And while months have passed, I do not see a turning point in the stock in the immediate future. Signs continue to look bearish to me, so I would look at attempting to capitalize on the bearish trend I believe will continue.
Social Media sites are becoming more commercialized as they search for ways to generate revenue. Who pays? Small business. A company out of New York called Foursquare Labs is a location-based social networking service that is exploring a service that allows businesses to pay a fee in order to be listed higher in search engines on its mobile app. This is one small example, but Facebook will be the one with a greater impact. Something I just learned that most small businesses did not know is that a business on Facebook does not get all its newsfeed to its followers, only a small portion. The social media giant is now charging businesses a fee to have more of the newsfeed reach more followers. Some are not happy!
Facebook Lock-up Expiration
Facebook's rank-and-file employees can start selling stock they own on Oct. 29, even though Mark Zuckerberg is said to be holding on to his shares for at least another 12 months. How will this affect the stock? If a lot of shares flood the market, the price of the stock could fall. Peter Thiel, a board member and Facebook's earliest big investor, has shed most of his holdings, but this is normal for a venture capitalist position in the stock. Mr. Zuckerberg holding on to his stock will give it some stability.
Mobile Users Increase Revenue Per User Decreases
One of the challenges that Facebook had to reveal was that mobile users are becoming a great percentage of the users that access the sight on a daily basis. The problem with this is that Facebook generates less revenue from mobile users. And according to the SEC figures, revenue from the average Facebook user is in decline.
Price Targets Contract
Analysts are still not bullish on the stock, as many have made revisions on their price targets to the down side.
- Doug Anmuth, an analyst at JPMorgan, another large underwriter of the offering, cut his target price on Tuesday, to $30 from $45.
- The bank that orchestrated its IPO cut his target price on the stock to $32 from $38.
- Credit Suisse analyst Stephen Ju lowered his price target to $24, from $34
I would definitively say the stock is still in a downward pattern. Even though it attempted to push up in early September, it yielded to the strong bearish trend line and continues down even now. The RSI indicator continues to follow the same trend and supports the move of the stock without revealing anything new. The MACD, just like the RSI, supports the move of the stock after the same manner. It has just reached the bottom of the Bollinger Bands, and it could either follow the lower band down a bit, or possibly start back up. Even though the bearish trend is 3 weeks old, it may continue even longer.
The Options Play
Since I am not seeing a whole lot of positives coming out of the company yet, and the potential for a down turn is possible with the upcoming Look-up expiration, I would not consider myself bullish on the stock in the short term. If one is looking for a long term investment, I would also remain neutral on the stock. It is presently trading at 19.75. Let's look for a short term income play moving with the bearish trend.
- Buy the January 2013 put with a strike of '19' (priced at $1.90)
- Sell the January 2013 put with a strike of '18' (priced at $1.40)
- Net Debit to Start: $0.50
- Maximum Profit; $0.50
- Maximum Risk: net debit
- Maximum length of Trade: 4 months
Reasoning behind the Trade
- Play the trend
- Lock-up expiration has bearish potential
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.