Is The New Facebook Optimism Warranted?

Sep.17.12 | About: Facebook (FB)

Facebook (NASDAQ:FB) may have bounced off a long-term bottom last week, after CEO Mark Zuckerberg offered some promising ideas for raising revenue.

Analysts were impressed by the idea of the company creating its own ad network and entering China. They were over the moon about Facebook creating its own search engine, based on internal traffic Google can't track. A Techcrunch.com editor called the last "Faceboogle."

But the possibilities should not distract investors with some inconvenient truths. The income statement Facebook last offered the street was a disaster, with tiny revenue growth from March and a huge loss. Hope lies in its $10 billion in cash, and the chance that Zuckerberg can do something worthwhile with that cash to raise sales.

Trouble is, hope is not a plan. And there remain a significant number of lock-ups to expire through the end of the year, giving Facebook insiders a chance to exit the company, some of them at a profit. Zuckerberg's own statement that he would keep his money in his own company was seen as a positive, but a founding CEO is expected to do that, and far more telling should have been venture capitalist Peter Thiel's decision to cash out near the lows.

Facebook is not due to report earnings again until the end of October, so until then there is no visibility on its prospects, just talk. And that talk is coming almost exclusively from people with an interest in boosting the stock, namely Facebook insiders.

The recent action in Facebook stock, then, should be seen in context with the moves of other big tech companies, like Google (NASDAQ:GOOG), now near alltime highs, and Microsoft (NASDAQ:MSFT), which has also been rising. Yes, go back a month and Facebook's performance has outdone even Apple (NASDAQ:AAPL), but it's from a lower place. A rising tide lifts all boats, and a tech boom lifts lagging boats even more.

Don't buy the head fake. Wait for the earnings release before you think about buying.

Disclosure: I am long GOOG, AAPL, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.