What the Zuck? Facebook up 30% from lowsSeptember 20, 2012: 1:05 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
Facebook (FB) is on a tear lately. Shares are up about 17% since CEO Mark Zuckerberg spoke at the TechCrunch Disrupt conference last week and merely stated the obvious: that the performance of the stock after the IPO was "disappointing" and that mobile "is the future." The stock is now up 30% from the low of $17.55 it hit earlier this month.
So has Facebook bottomed? It's too soon to say.
Sure, bulls can point out that Facebook still has room to run. The stock, now hovering around $23, remains 40% below its offering price.
Sean Udall, an independent trader in San Francisco and author of the TechStrat Report for investing site Minyanville, said that he would be an aggressive buyer of the stock as long as it remains below $24, adding that it was "lunacy" when the stock was trading in the teens and that it would take "something shocking" for the stock to return to those levels. Facebook is one of his five largest holdings, Udall said.
Facebook hasn't rallied solely on Zuckerberg's remarks. Shares popped more than 6% Wednesday on reports that the company was testing a mobile ad network. That could be a potentially huge revenue stream for Facebook.
There is also chatter that Facebook may be looking to develop a social search engine, a move that would be a direct shot at Google's (GOOG) bread-and-butter business. And Reuters reported Thursday that Facebook is going to start charging retailers to send deals out to Facebook users. This Facebook Offers service used to be free for merchants.
The fact that Facebook seems to realize that generating more revenue from its nearly 1 billion users is actually cool and not something to be ashamed of could be reassuring some fans of the stock. But it seems to me that investing in Facebook before its third quarter earnings report next month is a big risk. Presumably, Facebook will offer up more details about its mobile advertising strategy.
Now that shares are starting to gain momentum again, one could argue that so are investors' expectations. But despite the recent rebound in the stock, analysts have not been rushing to boost their earnings forecasts. According to data from Thomson One, the consensus earnings estimates for the third quarter and fourth quarter of this year, as well as for 2013, have remained the same since Facebook reported second-quarter results in July.
Shares of Facebook trade at nearly 40 times 2013 earnings forecasts, a high price for a company that still has a lot to prove. There are plenty of cheaper options in tech for investors that want to capitalize on the growth of mobile -- and many of them pay dividends, too.
"Ultimately, value asserts itself. The market rewards companies with lower valuations and punishes those with higher valuations," said Wasif Latif, vice president of equity investments at USAA Investments in San Antonio. Latif said the large-cap funds managed by his team own Apple (AAPL), Microsoft (MSFT) and Cisco (CSCO), but not Facebook.
Another worrisome sign: Other social start-ups apparently don't feel that IPOs are the way to immediate riches anymore. They have been scared enough by the Facebook face plant -- not to mention the poor performance of other hyped social media companies like Groupon (GRPN), Zynga (ZNGA) and China's Renren (RENN) -- that they no longer think going public is a lucrative strategy.
"Companies are looking at the IPO market, post-Facebook, and deciding that M&A is a better path to realizing liquidity now," said Louis Draper, managing director of the technology investment banking group for brokerage firm Baird. "IPOs will eventually become attractive again, but right now the trend is toward a sale of the company."
Facebook, of course, is way too big to get gobbled up by a larger firm -- and it's highly unlikely that Zuckerberg would ever give up control of the company he founded. But if smaller social media firms are suggesting that going public now is not the best idea, how can investors justify a much higher valuation for Facebook right now?
Until Facebook is able to clearly demonstrate to Wall Street that mobile social media advertising is truly going to be a monster of a market and not just a promising opportunity, then Facebook's stock may have trouble moving up much more in the next few months.
Simply put, its earnings have to wow investors. And even Udall concedes that Facebook may not be a great investment in the short-term. He likes the multi-year outlook for the company but points out that Facebook may not really show much progress on the mobile front until the first quarter or second quarter of 2013.
"Longer-term, the stock should go significantly higher. We may have seen the worst of the news," Udall said. "But they may not have a great quarter for a couple of quarters."
That's not what the traders who've been buying Facebook in the past few weeks want to hear.