Should You Buy Facebook Now?
U.S. stocks are relatively flat this morning, with the S&P 500 up about a point and the narrower, price-weighted Dow Jones Industrial Average down 0.21% as of 10:05 a.m. EDT.
Facebook gets a big "like" from investors
Shares of Facebook have surged more than a quarter this morning, hitting $33.40 -- a level not seen since the day following its calamitous IPO. Fueling the demand for the shares is yesterday afternoon's upbeat earnings report.
Facebook's "beats" on earnings and revenue are impressive, to be sure: During the second quarter, the social-networking company produced $0.19 of earnings per share against Wall Street expectations of $0.14, while revenue of $1.81 billion was well ahead of the $1.62 billion consensus estimate.
Beyond the fact that these numbers indicate solid growth, it's the way in which the growth was achieved that must be cheering investors. Indeed, Facebook appears to be on top of its transition to mobile -- this was a substantial concern that surfaced in the wake of the IPO, weighing heavily on the shares. Mobile revenue accounted for 41% of total advertising revenue in the second quarter, up from 30% in the previous quarter.
Should you buy Facebook now? From a short-term perspective, it doesn't make sense to buy the shares after they've popped -- indeed, the new information has been immediately factored into the price, and there is no advantage to be gained on a short-term basis in buying the shares now (traders, you've been warned!).
For a long-term, fundamental investor, this earnings report provides incremental information regarding the company's most recent performance and its current position, both of which, in turn, enable you to fine-tune your outlook for the company's expected future growth path.
Indeed, this morning, the market is doing at least one of two things in bidding the shares up: First, it's certainly raising its estimates of the company's future cash flows, second, it may be lowering the risk (and, consequently, the discount rate) it associates with those cash flows. Nevertheless, I think that risk remains underappreciated: At $33.40, investors are valuing the shares at a whopping 51.3 times the estimate for the next 12 months' earnings per share. Facebook is still a speculation, but if you're interested in technology, there are lower-profile -- and lower-risk -- opportunities out there.
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The article Should You Buy Facebook Now? originally appeared on Fool.com.Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.