Facebook Does The Reverse Gravity Thing, Defies Logic? No, Actually It's Quite Logical...

Reggie Middleton's picture

A couple of weeks ago after Facebook reported, I posted Hey Muppets, Only Another 100% Climb In Share Price To Go Before You Break Even With MS/GS/FB Investment Advice. You see, I warned about FB a half of a year before the IPO (reference the FB IPO Analysis & Valuation Note - update with per share valuation released exactly 5 months ago on 05/21/2012 (click here to subscribe)) stating that this thing was coming to market at multiples of a realistic valuation. So, what did Facebook's bankers do? They raised the offering price even more. Makes sense doesn't it?

Well, it makes more sense than the lock-up of hundreds of millions of shares ending, flooding the market with excess supply and the price of the stock.... increases!!!

Well, there may be a logical reason for this. By now, the more astute early investors in Facebook either read my analysis or somehow have come up with similar conclusions independently. That being the case, these guys had massive unrealized capital gains and a strong incentive to preserve them. Thus, they did what every hedge fund should do but what so little ever seem to do. What is that you ask? They hedged. I would assume that as soon as FB shares became available for short and/or puts started trading, these guys competed with me to get short in order to lock in whatever gains they still had left. That being the case, once the lock-up period expired, and actual sales occurred it was offset (and possibly then some) by the supportive buying created by the short position covering.

Of course, this is just a theory, but its a plausible one. Only time will tell if it holds water, for if the upward price pressure was cause by short covering, it will be over by mid-week and we should see a marginal decline.

I also happened to do the same on the Max Kesier show...

Subscribers who haven't refreshed their viewing of our Facebook research should do so now - (subscription only) FaceBook IPO & Valuation Note Update. Pro and instititional subscribers are welcome to peruse the downloadable Facebook Valuation Model, allowing you to input your own assumptions in the very unlikely event you may not agree 180% with me :-)

Additional Facebook analysis, valuationa and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook...

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adr's picture

SO everyone and their mother hands Facebook executives and the employees and extra 10% just to allow them to buy massive amounts of shares they can short?

SO Facebook demand is so strong because everyone knows the company is a steaming pile of excrement and they want to profit on its collapse. I mean its a good theory but one that hasn't quite worked in this bizzaro market.

EscapingProgress's picture

FB is a turd. Up to half of its ad revenue or more is derived from bots endlessly clicking ads.

Reggie Middleton's picture

I posted this on my site last week,. It  looks as if there's some credence to my theory since FB is down nearly 3% on a day when the NASDAQ soared 2.21%.