Are You Ready to Give Facebook a Second Chance?

The world's greatest social network, Facebook (NASDAQ: FB  )  played perfectly into what the term IPO  really stands for -- It's Probably Overpriced. Understandably, the company had pressure to go public so its investors could get the payday they earned, but it's been a road to recovery since day one of its trading. In this week's earnings release, the company showed investors that it had successfully addressed the mobile issue. In a year, mobile ads have gone from a barely material amount to approaching half of the company's total ad revenue. The stock, in turn, is trading at its highest level since the first day of trading a little more than one year ago. Is Facebook finally worth your investment dollars?

The markets were in an uproar on Thursday as Facebook delighted the Street with its impressive earnings results, including a 53% gain in revenue, tremendous gains in mobile ads, and the promise of greater growth with its photo sharing site -- Instagram -- primed for the advertising stage. With Thursday's gain of 30% in share price, the company is within $4 of its initial public offering price.

Investors in Facebook should, obviously, celebrate -- there have been an enormous number of Facebook bears (including the author) since even before the IPO, and it's nice to be the guy who can say, "told you so." But this should serve as an important lesson for investors interested in the hot IPOs going forward. With Facebook's blowout quarter and solid execution over the course of a year, the company is still well short short of its original offer to investors.

Maybe it's just me, but it still sounds like the IPO buyers were ripped off, as they too often are.

A buy today?
So an IPO was overpriced, that's hardly news in the world of the stock market (even if it is often forgotten), but is Facebook going to start behaving like a normal stock now?

There is certainly more clarity to the company's ability to grow sales than there was a year ago, which should go a long way in investors' analyses. The company has proven that it can leverage its user base to demand money from advertisers, and has gone on to finally make that work on the mobile end, as well. Looking forward, mobile ads will take over desktop ads, as Zuckerberg noted in the conference call, and the company can begin selling ads on its coveted photo site, Instagram.

Instagram offers more opportunities than the normal Facebook newsfeed in that it uses 15-second video clips, similar to Twitter's Vine. This will definitely be appealing to advertisers looking to get in on the photo service's users.

As far as value goes, Facebook is still a mighty expensive stock at more than 44 times forward earnings. The 30% gain on Thursday may taper in the coming months, so there is no rush to hit the buy button. Overall, management deserves at least a small pat on the back for proving there is a business behind the hype.

It seems that finally, investors can start taking this stock a bit more seriously, only 15 months after its IPO.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped by just a handful of companies like Facebook. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.


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  • Report this Comment On July 27, 2013, at 1:41 AM, TMFTomGardner wrote:

    I'm not sure why this multiple is considered high with these growth rates. Google has had a whopping p/e, justified by its growth rates in usage, data aggregation and cashflow. I expect the same for Facebook, with a slighter shorter run from here until "too big to succeed" becomes the risk. I continue to think this company is priced inexpensively for long term owners -- 3-5+ years.

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