Facebook (Nasdaq: FB) stock is up more than 30% today as investors applaud the second-quarter earnings report released yesterday (Wednesday).
Investors were thrilled to see FB earnings improve from previous disastrous quarters, and their exuberance pushed Facebook stock above $30 a share for the first time since January.
But, before you think FB stock is now the hottest investment of 2013, take a closer look at what's going on.
First off, some of the gains are very likely thanks to a short squeeze. Heading into the release, some 39,754,124 FB shares were sold short, making it currently one of Nasdaq's most heavily shorted stocks.
Volume suggested a race to cover shorts was in play.
And despite the solid gains, Facebook stock still isn't trading over its May 2012 IPO price of $38, a level not seen since the famously flawed debut.
"Bottom line to me is Facebook may prove to be a great short-term trading opportunity, but I remain absolutely convinced it has no place in a long-term investor's portfolio," Money Morning Chief Investment Strategist Keith Fitz-Gerald said. "Where's Eastern Airlines today? Where's Palm Inc.? Research in Motion (Nasdaq: BBRY)? AOL Inc. (NYSE: AOL)? Myspace?"
While some investors get lured into this Facebook exuberance, here's why Fitz-Gerald warns against it.
Sure, Facebook Earnings Weren't Bad…
FB stock opinion aside, there's no question this was the best Facebook earnings report since the company went public.
The social media giant posted earnings of $0.19 a share, a nickel better than forecasts, and up from $0.12 a year earlier. Revenue climbed to $1.81 billion, also beating projections of $1.62 billion, and up 53% from $1.18 billion a year ago.
The big question on everyone's minds was how the Menlo Park, CA-based company tackled mobile. Facebook was late to the mobile arena and has been playing catch-up since. It finally appears as though it's making headway.
Mobile advertising revenue accounted for roughly 41% of Facebook's $1.60 billion in total advertising revenue in Q2, up from 30% in the first quarter.
"They've taken three or four quarters to try to fix the mobile issue," RBC Capital Markets analyst Mark Mahaney told CNBC. "They've gone from zero of their revenue being mobile to almost 50% now. That's pretty good evidence that they've fixed the mobile issue."
The mobile monthly active user tally at the end of the quarter was 819 million, up 51% year-over-year. Daily active mobile users averaged 469 million in June.
The overall daily active user count grew at a more modest pace, up 27% to 699 million on average for June, while monthly active users averaged 1.15 billion at the end of Q2.
The efforts stemmed from some deliberate Facebook moves to morph the company into a truly mobile-focused operation.
"The investments we have made over the past year are really paying off to position the company to thrive in a mobile world," David Ebersman, Facebook CFO, told CNBC.
But, Investing in FB Stock Still Isn't Good…
We here at Money Morning give Facebook CEO Mark Zuckerberg the proverbial "pat on the back," but we still don't think these shares are a good "Buy."
"From the headline hype this morning, you'd think that Moses had parted the Red Sea again, and that Zuckerberg was ready to walk on water," said Fitz-Gerald. "But I think if you look behind the numbers, a couple things are really apparent, things long-term investors can't ignore."
A lot of people keep bringing up the past with this company, how they got burned from the IPO. Listen people, if you don't understand a company, don't invest. Truth is, more youth are using facebook then actual investors, this means that its still the major player for online social networking and community. Car clubs, book clubs, organizations don't need websites anymore, they just use facebook. You add this change over with subtle advertisement, you will get huge profit.
I still expect Facebook to go upwards of $50+/share because a lot of companies are using it to specifically target products to the interested people.
If you don't understand how modern marketing works, then stop complaining and telling people what to invest in. This has helped pioneer the future.
Facebook is a dying trend. The fact it even went public was an unintended mistake and a severe miscalculation by Zuckerberg. He had the ability to keep it private which is what he claims he wanted all along, yet greed for exponential wealth held him back. He is a smart computer programmer, but lacks any sort of knowledge on how to run a multi billion dollar public company. Showing up to an IPO dressed in a sweatshirt shows how serious he is to take this bull, or dying bull, by the horns.
Facebook has a seriously flawed marketing approach, James. It's entire marketing strategy can be broken down to essentially them getting more users, and hoping that ad agencies will pay, and continue to pay, to post on the sides of pages. Market research has shown that the vast majority of users are under the age of 25, which happens to also be to ads target market. Unfortunately in this economy, most of those people are likely unemployed or severely under employed. There are big companies willing to spend big dollars to stick their feet in the water and see what they get, which is what we're seeing now. As these companies realize that their target market on FB isn't consuming their products there will be a massive draw back on spending on FB ads. I see the stock value dropping to around 20 a share by years end, which is still about a 1:33 ratio of earnings to value. For comparison Apple has a 1:14. FB now has a 1:66. I see Zuckerberg out as CEO in 2-3 yrs. A possible FB collapse is possible in around 5 years. Good luck.
Bill, thanks for bringing up the P/E!
That Facebook further on does not pay out a dividend, nor has any intention to, makes it into a true magic box that may have money but a small investor will never see any of it, and the shares value is ONLY based on the belief there is a bigger fool out there willing to pay more for your magic box than you did.
Mind you, even if you could open the box and get that 10-20c/30 dollar out, it still isnt a very good magic box.
Me I prefer shares not having P/E ratios much higher than 10, which makes Facebook aside from being hostile to small investors (no dividends), also overpriced on a level of 20 times too high a price. If its ever down to some 2 dollars a share (at these earnings, which can hardly change much, upwards anyway) and they pay 8c/dollar, I might get interested, but not before.
Ill finish this off by mentioning the Baltic stock market (Estonia, Lithuania, Latvia) that has tons of such magic boxes that don't pay dividends thanks to tax laws that leave the companies untaxed until they do so. Those shares have P/E values of 2 or 3, looks like free money doesn't it? Except the magic boxes are closed and will remain so as long as the big owners are happier merely getting big wages and using the money on jets and fancy offices for themselves. (or the equivalent)