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Is Facebook stock a good buy?

By Greg Guenthner · Bankrate.com
Thursday, August 1, 2013
Posted: 10 am ET

It was a long, hard first year for Facebook shareholders.

Despite winning praise as the most important initial public offering in years, Facebook's first week as a publicly traded company in May 2012 ended in misery for anyone who eagerly scooped up shares during the debut.

Then things got even worse. After topping out near $45, Facebook stock began a long decline that took shares below $18 in just four months.

Then the backlash began. Investors became impatient. Some analysts and journalists began to question the underwriters. Was the offering too pricey? Would Facebook ever live up to the hype?

However, all of the criticism vanished last week after Facebook reported its first knock-your-socks-off earnings report. Now Facebook shares have completed the ultimate turnaround, rising more than 50 percent since the end of June. Those who bought on the first day the stock openly traded are at breakeven.

"The gain is a turnabout for Facebook, whose stock slumped as low as $17.73 in September," Bloomberg reports. "Concern about Facebook's ability to sell more ads for wireless devices weighed on the shares after its $16 billion IPO, the largest technology offering on record."

Solid numbers

Facebook management put analyst fears over its ability to go mobile to rest in its second quarter report. The numbers are solid. According to Facebook, 819 million users access the site using a mobile device every month, an increase of more than 50 percent over the previous year. It's also incredibly important to Facebook's 1 million-plus advertisers who want their content seen by on-the-go users.

The icing on the cake was the $1.6 billion in advertising revenue, an increase of more than 60 percent over last year's results. Investors needed to see that Facebook was able to lure advertising dollars as it expanded its mobile footprint. Again, the company delivered.

But the big question remains: Is Facebook stock a good buy at these levels?

New York University Stern School of Business professor Aswath Damodaran believes Facebook stock is overpriced.

"So, the value of the company hasn't actually wavered that much over the last year and three months," Damodaran told CNBC earlier this week. "I don't share the euphoria that people have about mobile monetization because I think they needed to do that. If they hadn't done it, it would've been disastrous. At $38, I think the stock is richly priced."

Whether you agree with Damodaran’s analysis or not, it is important to approach Facebook with a skeptical eye. The stock has posted significant gains over the course of a couple of weeks and captured the attention of media and analysts alike. Longer-term-minded investors should take their time with this stock. It never hurts to let the hype die down before jumping into a new position.

***

Greg Guenthner, CMT, occasionally blogs about investing at Bankrate. The views expressed are entirely his own and do not reflect those of Bankrate.com.

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4 Comments
Monroe
October 27, 2013 at 6:40 pm

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Chester Aleman
September 24, 2013 at 9:56 am

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Carol
September 12, 2013 at 6:06 pm

I agree with Damodaran's analysis, without a doubt Facebook is way over priced. Why? To reiterate the above comments, going mobile is a given for any on line social site as people graduate to iPads and such. The question everyone should ask is that going to actually generate more advertising dollars for Facebook. Perhaps yes in the short term but in the long term I think not. Many advertisers are still trying to find an ROI on their advertising investment with Facebook and other on Line advertising outlets. I believe that they will discover in time that the ROI is going to be substandard and there will be a fall away of this sort of advertising. Simply put there is no solid ROI. I personally use Facebook to stay in touch with old friends, out of the 200+ friends I started with 2 years ago many are hardly using Facebook anymore. Yes they may have subscribers, but MANY of those accounts are inactive. So where is the audience? I believe the so called advertising audience is much smaller that what Facebook claims. What about all those inactive accounts? I bet they are counting them as an advertising audience for potential advertisers.