Is It Time to ‘Like’ Facebook?

After a pompous IPO back in May, investors definitely did not like Facebook the stock, and the price has been steadily dropping ever since, reaching all-time low at nearly 50% below the offering price.  So, is it time to finally ‘like’ the stock?

There are many arguments against that.  Here’s the rundown:

• Valuation.  Even after the drop, the valuation relative to most other Internet names remains expensive.  Facebook forward P/E ratio is still high at 30, while P/S (price to sales) is at 10.  Compare that to Google’s forward P/E of 14 and P/S of 5 – and that’s a fair comparison, since Google and Facebook projected growth rates are fairly similar.
• Lockup Expiration.  Facebook has over 2 billion shares outstanding, but only about one billion float.  The difference is currently in lockup period — early investors and employees own the stock, but will be only able to sell after lockup period expires in several tranches.  The first tranche of 217 million shares became available to trade this week, and obligingly the stock declined.  But by far the largest chunk of shares, about 1 billion, will be available to trade on November 14, creating very heavy selling pressure on the shares.
• Taxes.  With all the talk about fiscal cliff, there is uncertainty about tax rules next year.  There is a good possibility that capital gains tax rate will be higher in 2013.  So all these early investors may be tempted to sell this year to lock in favorable tax rates, creating selling pressure at year end.
• Taxes – again.  Those unfortunate investors who bought near IPO prices may want to sell their shares this year to harvest capital losses, yet again creating selling pressure.

Taking a longer-term view, however, Facebook is certainly a unique company.  Very few companies can boast nearly a billion customers, and there is no real competition (Google+ being very far behind).  The trick, of course, is to figure out how to effectively monetize all those customers, and you can be assured that Facebook management is concentrating on that right now.  Netflix chief Reed Hastings who is on Facebook board and billionaire investor George Soros subscribe to that view: they recently bought $1 million and $10 million worth of Facebook stock, respectively (both are now down slightly in these positions).

My view is that aggressive investors may want to establish a small starting position now.  However, heavy headwinds this year as described above will probably make you like Facebook stock price much better later this year (unless you already own it, of course).

Weathering Summer Days

The second quarter earnings season is all but over, and it was a fairly good one.  About two thirds of the companies reported beating earnings estimates, although these were somewhat reduced by analysts in the preceding months.  The market reaction to earnings news was definitely more benign than in the previous quarter.  Then, even the companies with solid performances registered, at best, minor gains or minor losses, and those that merely matched expectations or were guilty of slightly missing them were taken to the woodshed.  This time around, Mr. Market’s reaction to earnings report was a bit more sensible.

The market, meanwhile, managed to rise for five weeks in a row and is sitting near four months high.  The traders seem to have turned their attention to actual earnings, rather than the news from Europe.  Some positive economic reports here in the U.S., most notably more good news from the housing sector, also helped.  However, Europe is still far from resolving the debt crisis, and at some point scary headlines will return.  Some consolidation in the market in the near term is warranted.

As you know, I prefer to look past short-term fluctuations and to view quarterly results as a single step towards wealth-building goals.  There many companies out there with excellent fundamentals and prospects, even if they might be guilty of not exactly meeting analyst-estimated earnings targets.  Let us therefore concentrate on them, rather than on an economic headlines du jour.