Facebook Delivers, but Was That Already Priced In?

Facebook knocks it out of the park, but how long does the music continue?

Feb 2, 2014 at 2:00PM

Whenever an incredibly richly valued company "beats" estimates on the top, or bottom, line, the shares seem to surge rather dramatically. Why is that? Well, one likely explanation is that often these stocks are viewed as "no-brainer" shorts and tend to accumulate significant high short interest. When such "no-brainer" shorts end up outperforming, then irrespective of valuation, there is usually bound to be some panic buying.

Is that what happened with Facebook?
Take a look at the recent short interest numbers for shares of Facebook (NASDAQ:FB):


Source: NASDAQ

While a short interest of 44 million is negligible compared to the 2.4 billion shares outstanding today, it's important to note the trend in short interest. The number of shares sold short has increased 63% since mid-September. Perhaps not-so-coincidentally, the shares are up about 50% during that time. The better the news from Facebook gets, the more painful it gets for short sellers (which drives short covering and more pain for the remaining shorts -- this is known as a "short squeeze").

It's hard to say whether Facebook shares underwent a short squeeze when they gained nearly 14% in the post-earnings report session, but given the company's already sky-high valuation and its immense size (this is a $150 billion+ market cap name that we're talking about here), it's very curious to see such dramatic percentage moves in the value of the company's stock.

Internet bubble 2.0?
When looking at names such as Twitter (NYSE:TWTR) and Facebook, it's clear that these technologies are in many ways disruptive and that there could very well be some real long-term value to these names. Facebook, in particular, has been extremely aggressive in building a "moat" with its user base and, after taking some pretty serious heat for "failing" to monetize mobile, has really turned things around there.

However, the problem is that much of the "future value" has already been baked into the price at this point, skewing the risk/reward squarely to the downside. At a greater-than-$150 billion market capitalization, Facebook is already worth nearly half of what Microsoft is worth at a fraction of the net income. Same goes for Facebook vis-à-vis Google. In short, Facebook trades as though the future profits are guaranteed.

Foolish take
As long as Facebook keeps beating estimates and driving impressive top-line growth and average-revenue-per-user growth, then the stock theoretically knows no bounds. However, it is also equally important to recognize that when the company does slip and fall (and they always do), the shares will be repriced more in-line with what the growth rate actually turns out to be. The tricky part about making a recommendation is that Facebook really could be the next Google, and its "maturation" point could happen at prices well north of the current price.

So, it really comes down to whether you think Facebook is the next Google or the next MySpace. Twitter is unlikely to have the staying power of Facebook (given how much richer Facebook's ecosystem is), so that one is likely to fall well before Facebook does.

Bill Gates fears these companies
There are few things that Bill Gates fears. Cloud computing is one of them. It's a radical shift in technology that has early investors getting filthy rich, and we want you to join them. That's why we are highlighting three companies that could make investors like you rich. You've likely only heard of one of them, so be sure to click here to watch this shocking video presentation!


Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Twitter. The Motley Fool owns shares of Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information