Should You Buy Facebook When It's Cheap?

By Tim Parker | July 24, 2012 AAA
Should You Buy Facebook When It's Cheap?

May 18 was not a good day for Facebook or those involved in its IPO. First, the Nasdaq had problems getting the first trade in to the market. Then, by the end of the day, Facebook had closed at $38.23, only 23 cents above its IPO price. Making matters worse, insiders noted that underwriters had to step in and become buyers to keep Facebook from dipping below its original IPO price. Since May 18, Facebook hasn't found much life. It recently closed at around $28, representing an almost 25% decline from its IPO price. It took until the week of June 15, a month after Facebook's IPO, for the stock to have a week where gains outpaced losses.

Value investors are always looking for stocks that the investing public has cast aside. Many of these investors are now asking if Facebook is a beaten down stock but a strong company that will soon bounce back from its disappointing infancy as a publically traded company.

SEE: 6 Career-Killing Facebook Mistakes

Analysts Weigh In
June 27 marked the end of the 40-day quiet period allowing analysts to finally give a public thumbs up or down on the stock. Many of these analysts came from banks that served as underwriters for the IPO and the analysts' opinions were mostly tepid. A mix of "buy" and "neutral" ratings dominated their opinions.

Morgan Stanley, the lead underwriter, put a $38 price target on Facebook over the next 12 months, providing those who bought at the IPO price little hope for profits over the next year. Goldman Sachs gave Facebook a "buy" rating saying that the stock will rise 10 points to $42 per share over the next year, but Goldman Sachs is a part owner of Facebook making investors question its motives for such a lofty price target.

Multiple banks see Facebook reaching $35 per share in the next year, representing only an 8% gain in the price of the stock; this makes other companies, some of which pay dividends, better choicese for investors.

SEE: Stock Ratings: The Good, The Bad And The Ugly

Advertising Trouble
Facebook's revenue comes primarily from advertising, but the company has been unable to find a strategy that monetizes its huge user base, which is forecast to surpass one billion this year. Many studies have found that Facebook ads aren't profitable for those that purchase advertising space. In a filing before its IPO, Facebook said that the growth of its mobile site was growing faster than its ability to monetize the users. Add to this the large amount of innovations that have resulted in a less than positive user response, privacy concerns and lawsuits, and Facebook continues to struggle with how to make hundreds of millions of users into a profit machine.

The Bright Side
Not all of this is Facebook's fault. As one analyst said, the mobile ad market is in its infancy and nobody - including Twitter or other mobile-based ventures - has found the winning formula for monetizing large user bases; however, if any company has the resources to figure it out, it's Facebook.

For many, Facebook is part of their daily lives. Not only is it a place to "like" and "share," an increasing number of websites use Facebook technology to authenticate users and build traffic through the sharing of comments. Users listen to music, play games and keep up on world events. All of this makes Facebook a utility as much as a place to share ideas.

SEE: Why Social Media Isn't Like The Dotcom Boom

The Bottom Line
Investors want to know if Facebook is a value stock and they aren't getting a lot of help from the analyst community. Facebook has been around for a while, but the ability of the company to turn its massive user base into profits is the key to seeing its stock become attractive to investors. So far Facebook hasn't done that and while many believe it will eventually get there, investors may not be willing to wait.

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