What to do with Facebook shares now?

So, the Facebook IPO came and went and it certainly did not go the way Wall Street thought. Obviously demand was not as “spectacular” as it was claimed to be. Shares were sold at US$ 38 per share to those lucky (or unlucky) enough to get some. The company sold 421.2 million shares, increasing the number supposedly because of the strong demand. But let’s see what happened:

A total of 580 million shares traded on the first day. That means that many shares were sold more than once as investors tried to get on and sold before the close. Above you can se the “five-minute” graph. Each bar represents 5 minutes of trading. At the beginning, within the first five minutes there was an attempt to have the shares “pop” but they could not be moved beyond $44.7 per share. (A) above in the chart. After that, it went down to $38, the IPO price, point (B) in the chart.

Here we note the following: Whenever there is an IPO, the main broker or underwriter, in this case Morgan Stanley, is given a certain amount of money to support the price at the IPO price. Thus, they will buy at $38 until this amount is exceeded or the shares recover above the IPO price. This happened in points (B) and (E) in the chart above. The amount allotted was large, I could see “live” that there was a constant order to buy 9.999999 million shares whenever it hit $38, or at least US$ 380 million. By the end of the day in (E) that number finally went down, at the end it was like 3 million shares. But there were, in my calculation, 36 million shares traded at $38 in the last 40 minutes. That is about US$ 1 billion.

As you can see in the chart, there were two attempts during the day to have the shares close above roughly $41.6, but they were not successful. The stock kept drifting down and stayed for about 40 minutes at $38, with a slight push at the very end, to close at $38.23.

I believe that shares will eventually break the $38 level on Monday, but I may be wrong. What is important here is to understand supply and demand going forward.

Lots of individual investors want Facebook shares, they think it will grow, even if it is expensive. I would bet individuals were mostly buyers on Friday. Most of these shares are unlikely to come to market unless the stock drops sharply. People will hold on to them. But a lot will depend on whether it goes up or down from here.

1) Suppose it holds up above $38. In this case, I would wait until the stock breaks $41.7 to buy. Why? Simple, if 570 million shares traded on Friday, there are a lot of people losing money who may regret buying and are ready to sell if it gets back to their price between $38 and $41.7 (You could argue it is $44.7, but little volume was done there). Thus, until all of those that want to sell are “cleaned up” by demand, I don’t expect $FB shares to rise significantly above $41.7

2) Suppose it breaks down the $38 level (I think this is the most likely scenario, but I could be wrong, it happens). In this case, you have to wait to buy for the stock to find a base below $38, which could be all the way down to $30, but it will still have a hard time to get back up, because everyone between $41.7 and wherever it bottoms is a loser. Many will be ready to sell if it goes back up to their purchase price.

The “good” thing about $FB is that a lot of individuals want to own shares and those will not go back into the market. Thus, slowly the supply will dry up. Since there are only 420 million shares, it would take 4.2 million individuals buying 100 shares, or 800,000 buying 500 shares to dry up the offer. And until 91 days go buy, no new shares will come to market. So, one could expect a “pop”  before then if the supply dries up.

Thus, what may happen is that there is trajectory 1) below, where it never breaks below $38 per share and it starts moving up as it cleans up all those that want to sell. Once ot exceeds $41.6 that is the point to buy. Why? There are no sellers left!!! The stock could rise sharply from there as long as more supply does not come to market (Which will happen in 91 days, be careful)

But I think the more likely trajectory is the second 2): The stock will break below $38 tomorrow or Tuesday and will go lower. Slowly, it may take days or weeks, it will start building up, buying out the sellers. I would also buy at $41.6. Why? Because until it breaks that magic number, it will not “pop”. In fact, if it does not get to that number before the 91 days of the first lock up, the it will take much longer for $FB shares to pop above $41.6. It will be dead money until then.

That’s my take. Remember, I still think it is too expensive and should be valued less, but supply and demand will dominate trading, not fundamentals. Good Luck!