FBOn Monday, September 16, 2013, Facebook shares sank more than 4% to $42.51 after rising to an all-time high of $45.62 last week. The correction maybe an outcome of profit taking and the price is likely to go down further in the near future. Last month, Facebook’s prices finally reclaimed its IPO level after declining as much as 50% below its IPO price earlier this year. Higher Q2 profits and a better-than-expected mobile advertisement revenues, have pushed the stock up to its current levels.

Though San Francisco-based Twitter plans to outshine internet giants like Facebook Inc. and Google Inc. with its growing presence in mobile advertising, Q2 results show that Facebook’s revenue rose by 61% YoY as compared to 43% last quarter. Mobile advertising revenue grew substantially whereas desktop advertising revenue declined by 4% YoY.

The Long and Short of It

  • Valuation – FB is trading at a 192.35 PE. As the social networking industry matures, it is unlikely that revenues will rise to keep pace with this PE. Despite growth rates in emerging markets, we still see a saturation point. With a current EPS of 22c, if FB increases revenues by 500% over the next few years, the stock will still be trading at a 40 PE. Unless there is a new wave of monetization opportunities in the mobile advertising space, this multiple is baseless.
  • Mobile Advertisement – Facebook, aided by revenues from the fast-growing trend of mobile advertisements, has grown with the rise of the smartphone industry. According to Facebook’s Q2 2013 results, the monthly active mobile user base has grown to 819 million from 751 million in Q1 2013. Revenue from mobile ads has grown 41%this quarter compared to 30% in Q1.
  • Addition to S&P 500 – Facebook’s stock will potentially be added to the S&P 500 in the near future. This will make the stock a part of index investor and ETF portfolios. With the Twitter IPO news coming in, the social media industry is likely to require representation in the S&P index pretty soon.
  • Television – According to data from Facebook, approximately 100 million users log on to Facebook during prime-time television hours and most television shows have their own FB pages too. In the near future, one can expect a number of cross-advertising products that will encompass both television and Facebook, including video ads.

Our 12-month price target for Facebook is $42 whereas in the short-term, we keep a strong, bearish view on the stock. Its technical charts suggest robust sell signals and we have a short-term price target of $35 in mind. Facebook is trading above its 20-day simple moving average. RSI indicates that the stock is in the highly overbought territory and is very likely to go down in the short term. The tightening of the Bollinger bands is an early indication that volatility may increase sharply. While the MACD crossing the signal line from above indicates that a more selling pressure is imminent in the near term.


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