The demise of Facebook (FB) shares is nothing short of breathtaking. As the shares halted in early trading (due to the limit-down rule), the so-called "torch tally" stood at about $60 billion. That's the amount of market value that the social networking giant has lost in its brief two-month life as a public company. To put that into context, if you had $60 billion to spend, you could buy up Yum! Brands (YUM) and John Deere (DE) and still have a billion dollars left over to shop with!
And yet the Street (at least the part of it that writes research reports) is sticking with it — with nary a downgrade in sight, despite the stock posting double-digit losses. Go figure.
"Right now I think the market is somewhat irrational," says Victor Anthony, an analyst at Topeka Capital Markets, in the attached video. "If you look at the [Q2] results, they were strong," meeting bottom line and beating top line consensus estimates. "Overall it was a good quarter for them, but clearly the market demanded more. And I think that more was probably guidance from the company to give them some sort of comfort."
Anthony is one of about 20 analysts who did — and still does — rate Facebook a Buy. He's also leaving his $40 price target intact, which is slightly ahead of the median target price of $37.31, FactSet data shows. While there are clearly some areas of concern about the slowing pace of growth, engagement, and payments, Anthony and other analysts remain optimistic about the the company's future prospects and continued migration to mobile.
"Growth is slowing and we know that. It's coming off a large base," Anthony reminds investors, but he thinks that should begin to turn around next year as the one-month-old "sponsored stories" ad project matures and takes hold. "[Monetizing mobile] is definitely a real transition for them. It's a real transition for every internet company," he says. Anthony feels there's no reason why Facebook can't do it when the the likes of Amazon (AMZN), Ebay (EBAY), Paypal, Twitter, and Pandora can and are. "I think they ultimately monetize mobile."
Still, many investors are troubled by the slippage shown in another important metric: daily active users as a percentage of total users. But here, like elsewhere, Anthony expresses confidence that Facebook can and will continue to grow users and engagement, pointing out the opportunity that exists to grow in emerging markets — including China, where it is still blocked from doing business.
In the short-term, he's recommending that investors buy into the weakness being exhibited today and simply be ready for a long, volatile ride. As for the next scheduled hiccup in Facebook's path, Anthony says the expiration of the 90-day insider lock-up on August 16 will likely put some additional pressure on the stock, but he feels this type of sell-imbalance event will ultimately get absorbed.
"I'm bullish on the long-term story," he concludes. "And I'll be buying the stock."
Please answer our poll question below: Do you think Facebook will end this year above or below its IPO price of $38 a share? And let us know your thoughts on our Facebook page!
- Investment & Company Information