Facebook (Nasdaq: FB) Stock Is on Fire - So Don't Get Burned

Facebook (Nasdaq: FB) stock closed over $39 for the first time ever Monday, but the gains were short-lived. In mid-morning trading Tuesday, FB shares slipped more than 2% to $37.94.

Nonetheless, Monday's milestone, which took a long 14 months to achieve, left many investors giddy - and confused.

With shares trading above its May 2012 initial public offering price of $38, scores of market participants are mulling whether it's time to take the plunge and buy shares or pull the trigger on the lot they own.

Money Morning Chief Investment Strategist Keith Fitz-Gerald cautions investors not to go lured in. He compares FB to overhyped companies of the past that left many investors with buyer's remorse.

"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," Fitz-Gerald said July 25, after FB stock rose on a better-than-expected earnings report. "Where's Eastern Airlines today? Where's Palm Inc.? Research in Motion (Nasdaq: BBRY)? AOL Inc. (NYSE: AOL)? Myspace?"

Don't Buy Facebook Stock

Trading at a lofty 40 times next year's earnings, versus a mid-teens multiple for the broad-based Standard & Poor's 500 Index, Facebook shares look expensive. And with a current market cap of $93.18 billion, Facebook's rich valuation is more than three times that of Yahoo! Inc. (Nasdaq: YHOO) and two times that of Hewlett Packard's (NYSE: HPQ).

Additionally, scores of disgruntled investors simply want their money back after hanging on for more than a year, watching and waiting, as Facebook shares spiraled downward to a low of $17.55 last fall.

That's one reason why Carter Worth, chief market technician at Oppenheimer, says the recent rally will stall.

"You have to be concerned with overhead supply" of Facebook shares, Worth told CNBC. "So day-to-day, we think there's little upside. It will be stuck here for weeks at least."

After being stuck in the low-to-mid $20s for months, FB stock has soared some 44% year-to-date.

But when compared with other social media stocks, FB's gains look uninspiring...

Professional networking behemoth LinkedIn Corp. (NYSE: LNKD) has doubled so far this year, and Yelp Inc. (NYSE: YELP), a smaller Internet site that helps people find great local businesses, is up a whopping 180% since the start of 2013.

To be sure, Facebook is in much better shape than it was at the start of the year. But that doesn't mean it's a good investment.

Most of Facebook's gains came on the heels of robust second-quarter earnings, released July 24. Figures showed marked improvement in how the social network leader is monetizing its 1.1 billion members who are increasingly accessing the site via mobile devices. More than 40% of Facebook's ad revenue came from mobile in Q2, up from 30% in Q1.

But the mobile ad surge is coming at the expense of its real cash cow - desktop ad sales.

Moreover, Fitz-Gerald and several other analysts say the mobile ad improvement was way overplayed.

"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," Fitz-Gerald said after Q2 earnings. "But I think if you look behind the numbers, a couple things are really apparent, things long-term investors can't ignore."

Those things include the fact that mobile growth and revenue numbers from previous quarters were so low that they make any current growth appear phenomenal - when it's not.

Also, Fitz-Gerald said FB is going to hit increased competition going forward, which could hurt these "good" numbers.

Aswath Damodaran, a professor at New York University Stern School of Business, told CNBC he agrees the hype over Facebook's growing mobile revenue is overblown.

"I don't share the euphoria that people have about mobile monetization because they need to do that," said Damodaran. "If they hadn't done it, it would've been disastrous."

Placing a keen focus on investment valuation, Damodaran is downright bearish on Facebook shares. According to his research, shares should be trading at $24-$28.

We think that's kind. In fact, Fitz-Gerald thinks that's very generous - here's what he thinks Facebook (Nasdaq: FB) stock is really worth...

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