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8 Stocks Set to Soar off Facebook's IPO - views
WINDERMERE, Fla. (Stockpickr) -- The excitement is building ahead of the much-anticipated Facebook (FB) IPO. For a trader like me, this is like Christmas! Shares of Facebook have the potential to spike big time on its debut, and the derivative and sympathy plays should also see some hot action.
The biggest news of late on this hot IPO is that Facebook plans to increase the size of its initial public offering by almost 25% to 420 million shares, so it could raise as much as $16 to $20 billion due to strong demand for the stock. In addition, on Monday news broke that the initial pricing from the underwriters has risen sharply, from $28-$34 to $34-$38. That would make Facebook the fifth-largest U.S. IPO ever, according to IPO research and investment firm Renaissance Capital.
As a trader, I don’t love that Facebook is increasing the float right before its IPO debut. The lower the float, the higher the chance this stock can pop huge if demand is truly as high as some are anticipating. Remember when LinkedIn (LNKD) came public? LinkedIn didn’t bring anywhere near 420 million shares to the market for its IPO, and the stock more than doubled on its trading debut. To put things into perspective, LinkedIn’s float right now is just 60 million shares.
I also don’t love that the new shares Facebook is issuing are coming from Goldman Sachs, which is now selling as much as 50% of its stake, up from 23%. The Wall Street Journal released a list of some of the smart money that’s selling its stakes in Facebook. Others that jumped out at me were Tiger Global, which will now sell 50% of its stake, up from a planned sale of 7%, and Peter Thiel, who plans to sell as much as 50% of his stake.
If this deal prices at the high end of the range, the company could start trading with a market cap of $100 billion. To put things into perspective, Google (GOOG) had an IPO valuation of $25 billion, and it current has a market cap of $205 billion. Despite this high valuation, Facebook has enough buzz and excitement around it that the stock is probably going to make a monster move higher on its IPO debut. It would not surprise me to see the stock tag $55 to $65 a share once it hits the market. I would have probably predicted an even higher IPO price had Facebook not increased the offering.
With all of this in mind, let’s take a look at several Facebook sympathy and derivate stock plays that could spike significantly higher once Facebook’s IPO hits Wall Street.
One of the top Facebook sympathy plays and probably the purest play is Renren (RENN), which is basically the Facebook of China. Its platform enables its users to connect and communicate with each other, share information and user-generated content, play online games, listen to music, shop for deals and more. This stock is off to a monster start so far in 2012, with shares up 76%.
Renren has a market cap of $2.34 billion and an enterprise value of $1.20 billion. This stock trades at a premium valuation, with a trailing price-to-earnings of 42.31. Its estimated growth rate for this year is -233.3%, and for next year it’s pegged at 60%. This is an extremely cash-rich company, since the total cash position on its balance sheet is $1.04 billion and its total debt is zero. The total case per share for Renren is $2.64.
This stock is already seeing hot action ahead of the Facebook IPO. On Wednesday, RENN traded up 6.3% to $6.21 on volume of over 13 million shares. That volume was well above its three-month average action of 9,817,950 shares. Shares of RENN also recaptured its 50-day moving average of $5.95 and stayed within its recent uptrending price pattern that’s been in place for the last four months.
Market players should continue to look for long-biased traders as long as RENN is trending above its 50-day moving average of $5.95 with strong upside volume flows. I would consider volume that’s tracking in close to or above 9.8 million shares as bullish. If RENN heats up off the Facebook IPO, then this stock should easily take out some near-term overhead resistance at $6.81 to $7.87 a share.
Renren also shows up on a list of 10 Stocks to "Like" When Facebook Goes Public.
Another Facebook sympathy play is Quepasa (QPSA), more or less the Spanish-language Facebook. This social media technology company's Latin-American platform, Quepasa, and North-American platform, myYearbook, enable users to meet new people through social games and apps, monetized through advertising and virtual currency. This stock is off to a decent start in 2012, with shares up 13%.
Quepasa has a market cap of $135 million and an enterprise value of $139 million. This stock trades at a cheap valuation, with a forward price-to-earnings of 8.67. Its estimated growth rate for this year is 102%, and for next year it’s pegged at 4,200%. This is a heavily shorted stock since the current short interest as a percentage of the float is a whopping 23.6%.
The way I would trade QPSA off the Facebook IPO is to look for long-biased trades if it breaks out above its 50-day moving average of $3.85 and then its 200-day moving average of $4.07 a share with high-volume. Look for a high-volume sustained move or close above those levels that are near or above its three-month average action of 522,344 shares.
If we get that action once Facebook starts trading or after, then QPSA could easily explode to $5 a share or higher. I say "explode" because this stock is so heavily shorted and the float is so small at just 21.11 million shares.
I would simply avoid any long trades in QPSA is it fails to trigger that move above the key moving averages with volume.
A Facebook sympathy play that’s trading around $1 a share is FriendFinder Networks (FFN), an Internet and technology company providing services in social networking and Web-based video sharing. FriendFinder Networks operates several of the most heavily trafficked websites in the world, including PerfectMatch.com, AdultFriendFinder.com, Cams.com and FriendFinder.com. The company boasts that since 1996, 528 million users in over 200 countries have registered on its Web sites. This stock is off to a hot start in 2012, with shares up around 50%.
FriendFinder Networks has a market cap of $36 million and an enterprise value of $480 million. This stock trades at a reasonable valuation, with a price-to-sales of 0.12. Its estimated growth rate for the next quarter is 230%, and for this year it’s pegged at 266.7%. This is far from a cash-rich company, since the total cash position on its balance sheet is $23.36 million and its total debt is $470.79 million. The total cash per share for FriendFinder Networks is 74 cents.
The way to play FFN off the Facebook IPO is to buy the breakout trade. That trade will hit once FFN takes out some near-term overhead resistance at $1.34 to $1.37 with high volume.
Traders should look for long-biased trades off a sustained move or close above those levels with volume that’s near or above 543,626 shares. If we get that action soon, this stock could easily proceed to take out its 200-day moving average of $1.69 and potentially hit $1.90 to $2.50 a share. I would simply avoid this stock if it takes out some major previous support at $1.00 a share with heavy volume.
FriendFinder Networks is a favorite of the bears since the current short interest as a percentage of its float is a whopping 19.5%. If traders pile into FFN for a Facebook IPO play then the upside potential here is tremendous due to that high short interest and the fact that this stock has a float of only 8.2 million shares. This stock could short-squeeze big if it triggers that breakout over $1.34 to $1.37 a share with volume.
Zagg (ZAGG) doesn’t own a social networking Web site but is a strong derivative play off of the social networking boom. This company designs, manufactures and distributes protective coverings, audio accessories and power solutions for consumer electronic and hand-held devices under the brand names invisibleSHIELD, ZAGGaudio and ZAGGskins. This stock is off to bullish start in 2012, with shares up over 50%.
Zagg has a market cap of $331 million and an enterprise value of $356 million. This stock trades at a reasonable valuation, with a trailing price-to-earnings of 16.69 and a forward price-to-earnings of 10.74. Its estimated growth rate for this year is 39.7%, and for next year it’s pegged at 25.9%. This is not a cash-rich company, since the total cash position on its balance sheet is $16.86 million and its total debt is 42.63 million.
If Facebook and other social networking Web sites can continue to grow and see increased usage from consumers, then companies like Zagg are going to benefit in a big way. Consumers want to have access to their Facebook accounts on the go, so the use of mobile devices via apps is exploding. Facebook recently said that around 500 million people log into its site with smartphones and tablets. That’s more than half its users. Zagg is well-positioned to sell those 500 million users protective coverings for their mobile devices.
Zagg recently reported record first-quarter results that showed a 106% increase in revenue to $55.5 million from $27 million in the same quarter last year. Zagg is well-positioned into the social networking ecosystem since its products are complementary to the exact devices that are accessing the top social networking sites like Facebook and Twitter. In fact, Zagg’s products are a must if you want to keep your mobile devices in good shape. I use its products on both my iPhone and iPad, and I regularly access social networking sites on both.
Traders should look for long-biased trades in ZAGG once it clears its 200-day moving average of $11.23 with high volume. Look for volume on that move that’s near or well above its three-month average action of 1.2 million shares. If we get that move, then ZAGG can easily spike back towards its May highs of $12.75 to $13.29 a share if not much higher.
This is yet another heavily shorted Facebook IPO play since 43.7% of ZAGG’s float is sold short by the bears. If the big traders decided to rotate into Facebook derivative plays like ZAGG -- which I think they will -- then we could easily see a monster short-squeeze if the IPO is a smash.
Another Facebook derivative name that has a great chance of racking up huge sales if management executes is Skullcandy (SKUL). Social networking Web sites and the hardware and equipment for mobile devices are all tied together, and Skullcandy fits right into that ecosystem. This company develops and distributes headphones and other audio accessories to retailers throughout the U.S. and to distributors in various countries worldwide. Skullcandy also makes iPhone cases, iPhone docks, iPod cases, iPod docks and even clothing, bags and backpacks. During the last six months, this stock has dropped 25%, and it’s virtually flat on the year so far in 2012.
The more people that access social media sites such as Facebook through their iPhones, iPads and other mobile devices, the higher the probability that Skullcandy has of increasing sales of its popular headphones and other products built for such devices. Skullcandy also has a very popular mobile app that delivers geo-located destinations for Surf, Skate, Snow and Moto and up-to-the-second reports. Skullcandy’s mobile app has already been downloaded over half a million times. Plain and simple, Skullcandy is entrenching itself into the social networking ecosystem and positioning itself for rapid growth.
Skullcandy has a market cap of $344 million and an enterprise value of $356 million. This stock trades at a reasonable valuation, with a trailing price-to-earnings of 17.24 and a forward price-to-earnings of 8.83. Its estimated growth rate for this year is 17%, and for next year it’s pegged at 22.2%. This is a cash-rich company, since the total cash position on its balance sheet is $10.91 million and its total debt is $1,000.
This stock has sold off pretty hard from its April high of $17.76, with shares currently trading around $12.50. What’s interesting about the recent selloff is that it’s pushed SKUL right near some previous support zones at $12 to $11.79 a share. I would look for long-biased trades in SKUL if it takes out Wednesday’s high of $13.27 with volume. Look for volume that’s near or above 606,489 shares.
Keep in mind that Skullcandy is one of the most heavily shorted stocks on the planet. The current short interest as a percentage of the float for Skullcandy is an unbelievable 123%. A strong Facebook IPO could spark a big short-squeeze for Skullcandy if traders see the value I see in these social networking derivative plays.
Large-Cap Social Networking Plays
Some of the well-known large-cap social networking stocks could also catch a solid bid if the Facebook IPO goes gangbusters on its debut. Some names to consider are Yelp (YELP), which develops apps that connect people with local businesses.
Another is a name a mentioned earlier, LinkedIn (LNKD). LinkedIn operates an online professional network, and the company recently upgraded its mobile app to further entrench itself into social networking.
Zynga (ZNGA) is another potential Facebook sympathy play. This company makes social-networking games that are used with Facebook, including Farmville, Words With Friends, Zynga Poker, Scramble With Friends, Chess With Friends and Drop 7.
What I love about all of these names heading into the Facebook IPO is that they are heavily shorted. The current short interest as a percentage of the float for LinkedIn is 11.2%, for Zynga it’s huge at 51.9%, and for Yelp it’s around 14%. These stocks could easily see some sizeable short-squeezes if Facebook soars on its opening day.
Look to jump into these stocks and make some fast money if you see some pin action off the Facebook IPO.
To see more Facebook IPO sympathy and derivative stock plays, including Vringo (VRNG), Groupon (GRPN) and Sky Mobi (MOBI) check out the Facebook IPO Sympathy & Derivative Stock Plays portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.