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Sunday, June 8, 2014

Lesson : Facebook (FB)'s IPO base

A hot new initial offering may need time to cool off and set up a good buy point. It's the quality of the base formed, not how fast it forms after its market debut, that matters.

By the time Facebook (NASDAQ:FB) came public in May 2012, it had become one of the most anticipated initial public offerings. Leading up to its debut, the social network said it expected to price its IPO at $28 to $35 a share. Facebook actually priced at $38 by the time the debut came around, the second-biggest U.S. IPO of all time with a market value of $104 billion.

But the company's financial performance had raised eyebrows as its first-quarter 2012 revenue, operating income and profit margins fell from Q4 2011. The large amount of insider selling, too, sparked concerns.
On May 18, 2012, Facebook made a surprisingly weak showing. The stock popped 12% early and got as high as 45 before ending its first trading day with a 23-cent gain at 38.25.

The next two weeks, shares tumbled 17% and 13%, respectively, in heavy trade. The week ended June 8, 2012, they pared an 8% loss to 2%, a sign of support (1). It looked like Facebook might be setting up an IPO base as the stock rose the next two weeks. Instead, it headed south again and trended lower for the next 10 weeks before bottoming out and reversing higher in September. The stock fell to 17.55, 54% below its offering price. So much for buying a hot IPO on its debut.

Over the next three months, it built the right side of a choppy cup-with-handle pattern. This was its first IPO base. Facebook cleared the 28.98 handle buy point the week ended Jan. 11, 2013, and rose just 12%. It then carved a smoother, shallower base. This turned into a double bottom with a 29.17 buy point.

Facebook soared 31% the week ended July 26, blowing past the entry in its heaviest weekly trade ever (2). The firm reported very good Q2 results and succeeded in making smartphone-based ads a serious part of its revenue engine.

Facebook rallied 75% before forming a new base in October.

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