Is Facebook a Better Buy at $31 Than at $18?


Stocks fell for the second day in a row, with the S&P 500 , and the narrower, price-weighted Dow down 0.3% and 0.4%, respectively.

Bigger. Better. Cheaper?
At first glance, the question framed in the article title might seem absurd. With hindsight, who wouldn't want to pay less for the same asset? However, that assumes that we're operating with the same information regarding the company to decide between two prices, which isn't the case if we place ourselves back in early September. Yesterday's fourth-quarter earnings release provided us with some important information regarding a key challenge: Facebook's transition into a "mobile company," to use CEO Mark Zuckerberg's expression.

The early signs are that Facebook is navigating the transition successfully. Mobile daily active users -- arguably the highest value users -- overtook web daily active users during the fourth quarter. The new focus on mobile advertising, which was little more than a speculative activity at the time of the company's IPO, is paying off: Mobile advertising accounted for 23% of total ad revenue -- Facebook's overwhelming revenue source -- in the fourth quarter, up smartly from just 14% in the previous quarter.

Judging by the market's reaction to Facebook's results, the shares already reflected all of the positive news contained in the release - and then some. Today's Facebook has a better foothold in mobile and, therefore, better earnings visibility than it did on Sep. 4, the day the shares bottomed. But is that worth a near 50% premium in terms of its price-to-earnings multiple (based on the consensus estimate for next twelve months' earnings-per-share)?

Perhaps, but that doesn't exclude the fact that the shares are overvalued today. Given the massive uncertainty concerning what Facebook will look like five years from now, it's tough to argue that paying 47 times for this year's earnings is anything other than a speculation, with the potential of significant, permanent capital loss.

After the world's most hyped IPO turned out to be a dunce, most investors probably don't even want to think about shares of Facebook. But there are things every investor needs to know about this company. We've outlined them in our newest premium research report. There's a lot more to Facebook than meets the eye, so read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.

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Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him @longrunreturns. The Motley Fool has no position in any of the stocks mentioned. 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.

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