When Smart Money Enters the Facebook Trade
The shellacking Facebook (NASDAQ: FB) gets in the media these days is getting long in the tooth. The same applied to the adulation it got before Friday. Media and market sentiments are such fickle mistresses.
Facebook shares have seen little in the form of recovery since they launched. They are likely to enter and spend time in the $20s before shares land in the hands of people who have also held on to their common sense.
So far shares have been traded by one subset of investors: those who bought the hype and believed that, along with their FB shares, they were getting the Midas touch. Like any conviction not firmed through the slow process of due diligence, their thesis lasted about as long as the first red 1-minute candle on the trading chart. These early buyers became en-masse sellers, to more people who had thought like them. And so forth, shares got handed down like hot potatoes, until they found a temporary bottom in its fourth day of trading.
Panic was exacerbated, but was by no means due to, technical glitches at NASDAQ (NASDAQ: NDAQ). Many retail investors will complain about not having been allowed to cancel or move their orders. Their claim of a common sense that was not allowed to be exercised, however, is null, as it would not have allowed them to put in the Buy order to begin with.
So what we have here is a case of too many traders who had no idea what they were doing being let loose with their capital. When all of them unload their shares to better prepared buyers, or choose to hold their peace and give patience a try, then we may get the real story on Facebook.
Much is being made in the media to try and retroactively couple FB's chart with fundamental weakness “just coming” to the fore. That is not an argument, as that information was there before Friday.
I will not argue whether IPO price was the correct one, or whether the current valuation is the correct one. The truth is no one has a real handle on how to value Facebook. Many mention the 900 million active users. Others mention how those 900 million rarely click on ads.
The reality is Facebook is such a unique story that is still evolving that we do not know what the right measuring metrics should be. Should we look at clicks or impressions? Should we assume Facebook will be stuck with its current features or should we take it in good faith that the Facebook of tomorrow will be at least just as different from today's as yesterday's was? For that matter, should we assume Facebook's population is peaking at 900 million, or should we put that peak closer to the population of the world?
In the meantime, I marvel at the preposterous change of heart everybody has had. The true winners are the people who are quietly amassing shares or getting ready to buy in at even lower prices.
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