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Facebook Continues To Fall As The Analysts Think It Is Still Too Expensive

|About: Facebook (FB)

It looks like Facebook (NASDAQ:FB) is back to the free-fall mode it had been in since the overly hyped IPO of the company. A couple weeks ago, the company's share price recovered for a little bit when the company's CEO Mark Zuckerberg asked investors to be patient for a couple years, and told them that the company was working on a new mobile advertising network; however, the free-fall picked up from where it had left off when the analysts covering the company at Barron's shared their bearish opinions with the public. The analysts at Barron's think that the company is still overvalued despite being down nearly 50% since the IPO.

In the first day of IPO, the company's share price was as high as $42. Within the same day, the stock price fell to $38 and then all the way town to $17.7 where it found a short-term bottom. After rallying for a couple weeks, taking the price up to $23.3 per share, the company's stock price is down to $20.8 again. While there has been so much hype about the company's membership growth, there have also been worries about whether the company can actually monetize its huge database of members.

Barron's price target for the company is as low as $15 per share. This shouldn't surprise anyone given the company's revenue and profits. Furthermore, there is a huge uncertainty regarding the company's future as it attempts to find a way to monetize the members accessing the website through their mobile devices. The price target of $15 per share would give the company a forward price to earnings ratio of 24 and forward price to sales ratio of 6. Obviously, this valuation would still assume a lot of growth for Facebook, as a lot of technology companies trade for much lower multiples. For example, Apple (NASDAQ:AAPL) looks at a forward price to earnings ratio of 13 and forward revenue to earnings ratio of 4.

Facebook's addition to Nasdaq's Q-50 index didn't help the matters either. Nasdaq's Q-50 index is the last step before a company is allowed to enter in Nasdaq 100 index. Of course, the companies in Q-50 are not guaranteed to make it to the Nasdaq 100 index and Q-50 index serves as a watch list for Nasdaq. Think of it like the NCAA league where players have to prove themselves to be drafted by the teams in the NBA league.

One of the analysts covering the stock, Jordan Rohan of Stifel Nicolaus & Co voiced his concerns regarding the company's short term prospects:

"We do not believe success in mobile for Facebook can come without some collateral damage in the near-term to the larger, more profitable desktop platform. We assume that revenue upside from mobile is a bit further off than Zuckerberg was signaling."

Facebook's mobile user base is growing while the company's computer user base is declining, which implies that many of the website's members don't use their computers to access the website once they realize that they can access the it through their mobile phones without being exposed to advertisements.

Moreover, Facebook is having trouble motivating its employees. The company's stock based compensation is as much as its monetary compensation. For example, last year, the company's stock compensation totaled $1.4 billion and this year it has already passed $1 billion. These compensation figures are left out of company's profit calculations, meaning that the company's profits are much smaller than what its earnings statements tell us. As the company's share price plunges rapidly, the employees that are compensated with stocks will sell their shares as fast as they can in order to capture as much cash as they can, and this will result in further damage in the share price of the company. Also, as the company's share price plunges, it will have to compensate its employees with more and more shares to make up for the decreased value in the company's stock price. As a result, the company might start losing key employees to competitors soon.

The analysts have a consensus price target of $30 on Facebook. I don't think this will become possible before the company is able to fit big-enough advertisements in tiny screens of mobile phones without making its users angry. Currently Facebook's investors are mostly tied to the company based on emotion. This is evident to see as the slightest bad news or negative comment about the company can cause a double-digit percent plunge in the stock's price. There is too much volatility and too little value in this stock at the moment.

If Facebook actually surprises all the analysts by finding an effective way of monetizing its mobile device users, the company will have a huge potential. If not, it can see single-digit share prices. The company is in such a shape that it will either do extremely good or extremely bad depending on how it monetizes the mobile platforms. I am not a fan of buying Facebook; however, those who want to buy some shares of the company should wait until the end of the lock-up period in December when most of the shares held by the insiders are likely to be dumped in the market. Once that happens, I might initiate a position in Facebook depending on whether the company has made a progress in monetizing its mobile device users by then. Until Facebook learns how to make money, there are much better options out there.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.