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I was wrong about Facebook

September 24, 2013: 1:19 PM ET
happy-facebook-614xa

Facebook has gone from investing loser to tech stock leader thanks to its huge growth in mobile users and ad sales.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Blech. I'm not looking forward to dining on a small, black bird. But here goes.

It's time to eat some crow. I wrote a column about four months ago about Facebook's stock. It was called Facebook does a face-plant. We even included this less-than-flattering illustration at the top of the piece.

facebook-fall-614xa

At the time, Facebook (FB) was a terrible stock. Shares were trading around $24 and change -- more than 35% below their offering price. Making matters worse, this was happening during a red hot market.

Facebook was down nearly 10% year-to-date at that point while the Nasdaq was up more than 15%. And Facebook rivals Google (GOOG), Yahoo (YHOO) and AOL (AOL) were all doing better than the Nasdaq.

But oh how times have changed. Just look at the new image we have at the top of this story! Facebook has more than doubled since my overly bearish take on the social network.

The stock is up nearly 4% Tuesday on the back of a Citigroup analyst upgrade. Shares are now flirting with the $50 level and have soared an astonishing 85% this year.

So to anyone who bought Facebook at $45 on the first day it started trading, your patience has finally been rewarded. Congrats on being above water on that investment.

And if you scooped up the stock a few months ago in the mid-$20s ... or when it hit its all-time low of under $18 back in September 2012 ... then you don't need my congratulations. I could probably use more of your stock tips.

Related: Facebook stock finally tops $45

Now why was I so horrifically wrong? What did I miss? Simply put, I underestimated how much of an effort Facebook was putting into getting its mobile business on track.

Facebook's second-quarter earnings report looks like a huge turning point for the company. The growth in mobile users and mobile ad revenue was nothing short of phenomenal. The biggest knock on Facebook at the time of its IPO last year was that it didn't seem to have a viable mobile strategy.

That is no longer the case. Mobile ad sales accounted for 41% of total ad revenue in the second quarter. More than 800 million people now use Facebook on a smartphone or tablet. As a result, analysts have been busy raising their earnings estimates for Facebook for this year and next.

So can the momentum continue?

I reached out to Sean Udall, author of the TechStrat Report and a trader who owns Facebook shares. I quoted him in a piece in Money magazine I did last year about Facebook and other high-profile stocks. At that time, he predicted that "mobile could soon account for 40% to 50% of the company's ad sales."

He was spot on with that call. And he still thinks Facebook is a good bet. But he has some reservations.

"I'm a value guy. I can't like Facebook as much at $50 as I did at $25," Udall said. "But I still see a path for a higher stock price. It could get to $60."

Udall says he thinks that a big chunk of online ad dollars are shifting away from Google and toward Facebook ... at least temporarily. And Facebook still has room to grow on the mobile front. Still, he's more worried about Facebook now than he was a year ago.

For one, Udall said Twitter's upcoming IPO could steal some of Facebook's thunder.

"Once Twitter starts trading, it could do better than Facebook and all the other social media stocks," Udall said. "Momentum money could shift from Facebook to Twitter. Of course, it depends on how good Twitter's earnings are. But I will probably throw more money at Twitter than Facebook."

Related: Will Twitter avoid Facebook's IPO flubs?

Udall also said that Google remains a tough competitor. He referred to the company as the "Internet version of Berkshire Hathaway."

Comparing Google to Warren Buffett's conglomerate is heady praise. But Udall thinks that Google has been a great investor of its cash and has an "unparalleled acquisition strategy." He points to the relatively inexpensive (and wildly successful) deals for YouTube, DoubleClick and Android.

Another potential problem for Facebook? Within a few short months, Facebook has gone from a company that probably could have impressed Wall Street with earnings that barely topped forecasts to one that now must crush estimates to keep the hedge funds and other Big Money traders happy.

"If Facebook just beats by a penny or two when it reports earnings next month, the stock is not staying at $50. It will tumble because of higher expectations," Udall predicts.

All that said, it's probably not a good idea to bet against Facebook anymore. I've learned my lesson. Sure, the stock is by no means a bargain at more than 50 times 2014 earnings estimates. That's substantially higher than Google, Yahoo, AOL and Apple (AAPL).

But as crazy as Facebook's P/E ratio may seem, it pales in comparison to smaller social media stocks that are also on fire this year, such as LinkedIn (LNKD), Yelp (YELP) and Pandora (P).

Udall said that for Facebook and many other social networking stocks, the P/E may not be that relevant either. It's all about growth and momentum. Yes, we've heard that before. 1999 anyone?

Still, Facebook's current valuation may be misleading. If the company reports strong growth again in the third quarter, 2014 earnings estimates will likely climb even higher.

So can Facebook's stock keep going up? To borrow a phrase that the Federal Reserve loves, it's going to be data dependent. And for the time being at least, Facebook's data is pretty darn good.

  • Don't underestimate Google

    The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

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