Facebook may finally get some Wall Street loveJune 19, 2012: 4:20 PM ET
I doubt that there were any champagne corks popping in Facebook's (FB) Menlo Park headquarters Monday. But for what it's worth, Facebook hit a milestone in its brief history as a public company: Shares rose 4.7%, marking the first time that the stock was up for three straight days.
The winning streak hit four Tuesday. Facebook shares rose another 1.6%. So investors who bought Facebook on the day of its bungled initial public offering can breathe a little easier. The stock, while still down 16% from the $38 offering price, has rebounded 25% since hitting a low of $25.52 on June 6.
There's a chance that the company could get a further lift next week. That's because the 40-day quiet period in which analysts from banks involved in underwriting the IPO are not allowed to publicly comment on the stock will end on June 27. If history is any guide, sell-siders from many of the 33 firms that helped take Facebook public will initiate coverage with lavish praise that may border on being sycophantic.
It's not a slam-dunk that analysts will be universally bullish. There are concerns about holes in Facebook's mobile strategy and the legal hot water that lead underwriter Morgan Stanley (MS) has gotten in for reportedly sharing a negative earnings outlook for the company with some clients. But I'd be stunned if there were more cautious analyst reports than positive ones.
This might be good news for other social media stocks that have recently started to show some signs of life along with Facebook. The Facebook bump (and anticipation of more good news) may be one reason the social media group has bounced back. Investors may also be excited about the rumored purchase of corporate social network Yammer by Microsoft (MSFT) for more than $1 billion.
The Global X Social Media Index ETF (SOCL), of which Facebook is a member, is up 15% from a 52-week low set on June 4. Zynga (ZNGA), which investors view as being tethered to the virtual hip of Facebook, has gained nearly 25% since hitting a 52-week low just a week ago. LinkedIn (LNKD) is up nearly 20% in the past two weeks.
Of course, no long-term investor should buy a stock just because of glowing Wall Street coverage. Still, you can't dismiss (or deny) that traders still play the analyst upgrade game.
Just look at what happened with Groupon (GRPN) on Monday. Shares surged 11% after Morgan Stanley's Internet analyst (the same one who supposedly talked down Facebook) raised its rating on the accounting-challenged online coupon service to "outperform." That led me to declare the rise in Groupon as my Stupid Stock Move of the Day yesterday. (I do applaud the big Groupon news from Tuesday about a "Blues Brothers" movie night at Wrigley Field, though. The stock pulled back about 3% on Tuesday, however, which might be a sign that Groupon short sellers are also "on a mission from God.")
No matter how many "outperform," "buy" and "overweight" ratings we see for Facebook next week, make no mistake: Facebook is still an incredibly risky stock. The company isn't exactly suffering from the usual post-IPO dearth of analyst coverage either. There already is a critical mass of earnings estimates for this year and next that can be used to evaluate the stock.
Facebook is trading at nearly 60 times the consensus of 2012 earnings forecasts from 11 analysts. That is beyond rich. And while some professional investors who bought the stock before the IPO think it is oversold and are sticking with Facebook, many fund managers have also told me they still think Facebook is way overvalued. It might not be a bargain unless it falls under $20.
Facebook's long-rumored acquisition of Face.com became official on Monday as well. (Should Facebook also try to scoop up Book.com? Type that URL into a browser and it takes you to Barnes and Noble's Web site. Barnes and Noble (BKS) could use the cash. The stock fell more than 6% Tuesday after the struggling seller of books and Nooks reported a bigger-than-expected loss.) And while the Face.com deal is likely a small one, it illustrates another big risk with the stock. The company is likely to continue its shopping spree.
No matter how much Facebook spins some of these purchases as so-called "acqui-hires" -- i.e. they are really buying talented coders as opposed to products -- investors have every reason to be nervous that CEO Mark Zuckerberg will keep spending. If you don't like this strategy, there's little to be done given Zuckerberg's controlling interest in the company.
It's also unclear whether the company's new Exchange real-time bidding service for advertisers will dramatically boost sales and profits. The bottom line for any investor who is considering a purchase of the stock is that it would probably be wise to see how the company fares when its releases its first earnings report as a public company. That will come sometime in July or August.
Analysts will have a lot to say about Facebook next week. But we won't know if the analysts are right or wrong until Facebook tells us even more about its financials, growth strategy and mobile plans.