Facebook - From Headliner To Also-Ran

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It's been fairly well documented that the Facebook (NASDAQ:FB) IPO opened to much fanfare with praise such as "once-in-a-lifetime opportunity," "history in the making," and "it will make you money hand over fist." The masterminds on Wall Street priced it at $38, only to see it be cut in half a few months later to $19. I picked up a small piece of the action today for inclusion in my portfolio. This was not a spur-of-the moment decision.

Granted, the stock is in need of divine intervention to stop the slide, especially after the media firestorm of late. Out of all the bear articles I have read, Henry Blodget's piece was probably the most informative and well balanced. Both Blodget and ValueLine cautioned that until Nov. 14, more lock-up restrictions will expire with approximately 1.5 billion shares flooding the market. Things turned from bad to worse when board member Peter Thiel unloaded 72% of his remaining shares for a cool $400 million last week. Obviously the honeymoon period is over.

If we tabulate the earnings estimates, it's easy to see the stock is overvalued when compared to large-cap technology companies like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). The average annual earnings estimate for 2012 is $0.55/share. The high projection is $0.76/share and the low is $0.48. Just using the low estimate, we get a P/E ratio of 38. Apple and Google have P/E ratios in the mid-teens. However, one thing that differentiates Facebook from Google and Apple is that it is a massive communications system. Sure, Google has Google+, but that is an upstart. Facebook is the proven leader.

Facebook is no longer a hot startup, but its three- to five-year growth projections of 27% indicates they still have a lot of mojo left. Where I think the anomaly is, and one of the reasons why the stock is under so much pressure, is the growth for the current year is only 14%. Going out to 2013, projected growth jumps back up to 28%. With anticipated earnings per share of $0.63, you get a much more reasonably valued security with a P/E ratio of 30, which would give it a PEG ratio of 1. Granted, this projects out 16 months, but analysts usually start utilizing next year valuations in the fall.

One of the big knocks on Facebook is that it is primarily a desktop phenomenon and can't monetize its mobile phone application. That may be true for the last quarter, but during its first conference call, Zuckerberg put mobile as the company's No. 1 priority:

As of the end of June, 543 million people were actively using our mobile services every month, each month. That's 67% more people than the 325 million who were using our mobile services just a year ago. We've also found that people who use our mobile services are more active Facebook users than people who only use our desktop services. On average, mobile users are around 20% more likely to use Facebook on any given day. So mobile not only gives us the potential to connect more people with our services, but it also gives us the ability to provide more value and a more deeply engaging experience.

The 543 million mobile users is hard scientific data. Facebook has the No. 1 mobile app in the world. I think if you take the big picture point of view, you can see that there is tremendous opportunity for it in the mobile space.

How it goes about doing it is something that the CEO and his team are in the process of figuring out. They've done a terrific job of gaining digital dominance by building customer loyalty. My bet is that it will right the ship in regard to advertising on the mobile platform before the next conference call, slated for the end of October. That's before the lockup period expires, which may stem the bleeding, if not propel the stock upward.

However, I don't think the company can do it alone. From doing extensive research in the mobile broadband arena, my preference is to see it team up with a digital-agency like Velti (VELT) or Millennial Media (NYSE:MM). In 2010, Google bought Admob, and Apple scooped up Quattro, which are both in mobile advertising. To the best of my knowledge, Quattro is only on the iOS platform, and Admob will have a difficult time in China because it is, after all, a Google company. Facebook is an international company with a mobile app that is platform agnostic. It requires an advertising partner with similar credentials. Velti is the most globally positioned of all the mobile agencies.

Just going by analyst opinions on Yahoo Finance, out of 22 brokers that cover the stock, $23 is the low 12-month target price, while $45 is the high target. Even if the equity rises to the $23 level by next August, that's a 25% gain. I'll take that in a choppy market, and that's the most negative outlook. I don't like to haggle over price too much. It's tough to pick a bottom. I believe that a year from now I'll be very happy with a $19 entry point. My investing style is to try and identify stocks that may double in two to three years. Facebook fits the bill.

This is when I like to buy recent IPOs, when they have sold off. It's one of the many teachings of Peter Lynch, one of the best value investors from the past 50 years. Nobody likes Facebook now. It brings a lot of baggage with it, but it still is the No. 1 social website in the pixelated universe. Although Facebook needs a shot in the arm, I believe it's coming sooner rather than later. Zuckerberg may not have the vice-grip control on the business he did two years ago, but he's still the Chief Executive Officer -- he writes the checks. It's up to Zuckerberg to make things right for a publicly traded company.

Disclosure: I am long FB, VELT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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