Facebook’s Hot, But Valuation’s Questionable

Facebook’s HotI’m not sure if you’ve noticed, but Facebook, Inc. (NASDAQ/FB) is steadily edging higher on its chart and just flew above the $30.00 level last Wednesday, with nearly 105 million shares traded, the highest daily volume since November 16, 2012. There is clearly some market interest returning to Facebook since the stock plummeted to $17.55 on September 4, 2012. The stock price is still far away from its $45.00 high on its May 18, 2012 initial public offering (IPO) day, but the upward momentum and volume make Facebook an intriguing stock at this time, based on my stock analysis.

Driving up the current buying is news that Facebook is set to launch another new product or service this week that will likely include new services to generate much-needed revenue growth. The company has launched its mobile advertising model that could drive profits, according to my stock analysis.

What Facebook has in its favor is its massive user base of a billion subscribers. This is significant, and if the company can monetize this asset, my stock analysis suggests that the stock could continue to drive higher.

The stock chart below shows the nice, steady rally in Facebook since the stock broke above its 50-day moving average (MA) in mid-November 2012, with higher highs and lower lows. Based on my technical analysis, we may be witnessing a bullish cup-and-handle formation.

FB Facebook, Nasdaq stock market chart

Chart courtesy of www.StockCharts.com

Whether you blog, tweet, or meet face-to-face in the virtual world via Skype, Facetime, or Facebook, social networking offers vast opportunities, especially in China, as my stock analysis suggests. (Read “Why China’s Internet Sector Is Lucrative.”)

While I was not too keen on Facebook in the past, based on my stock analysis, I’m beginning to sense something big could happen as far as the company’s vast potential.

Again, Facebook has one billion subscribers to make money from.

My stock analysis tells me that social media stocks like Facebook need to deliver the growth and results that have driven other social networking stocks, such as LinkedIn Corporation (NYSE/LNKD), higher on the charts. The advantage LinkedIn has over Facebook is its high-quality subscriber list that consists mostly of business people armed with more capital to spend.

Companies such as Facebook and Angie’s List, Inc. (NASDAQ/ANGI), which debuted a year ago in November 2011 at a high of $18.00 and is currently down over 40%, have to figure out how to capitalize on their user lists to turn eyeballs into cash.

My stock analysis suggests that Facebook will need to generate revenues from its users the way Google Inc. (NASDAQ/GOOG) has done with its advertising and other broad Internet services and assets. Google is well into its development as a top Internet company, having recently launched a high-speed Internet service in some parts of the U.S.

My feeling, based on my stock analysis, is that Facebook will likely evolve over time, given its access to capital. The only thing the company really needs to do is make more money, as its valuation is too rich at this time. Trading at 48.0 times (X) its forward earnings per share (EPS) and 14.6X its trailing sales, my stock analysis suggests that Facebook is overvalued unless it can deliver something big. By comparison, Google trades at a much superior 16.0X forward EPS and 5.1X trailing sales. Applying Google’s valuation to Facebook, I continue to come up with a much lower stock price for Facebook.

So while there is some excitement being generated by Facebook, the stock price still looks high and could head downward unless the company releases something spectacular this week.

The bottom line is: Google is monetizing its user base; Facebook needs to.