Facebook Needs Smarter Investors

Facebook held its first shareholder annual meeting as a public company yesterday, and clearly a lot of investors don't get the social networking giant.

Some of the questions asked during the Q&A, as retold by Financial Times, seemed more along the lines of pointless venting than actual dissection.

  • Will the stock bounce back?

  • Will Facebook offer phone support for older users confused with the site?

  • Why is the news feed showing ads?

  • Should investors form a committee to review Facebook's stance on public policy issues?

I wasn't there, but I can imagine CEO Mark Zuckerberg's inner monologue as retail investor after retail investor asked unanswerable or ignorant questions.

Why did we have to go public? What have we done wrong? Are our users smarter than our shareholders?

It's true that Facebook has been a dud of an investment. The shares have lost 37% of their value since going public 13 months ago. The market has rallied in that time.

However, it's not Facebook's fault that underwriters -- drunk on hype -- were able to price the social networking website operator's offering at an unjustifiable price.

Facebook has actually done little wrong since going public. Fears of Facebook's popularity peaking have been rebuffed with every passing quarter. It's growing at a heady clip, and that's not going to end anytime soon. Analysts see revenue and earnings per share climbing 26% and 35%, respectively, next year.

Facebook even got a timely analyst nod earlier this week. Stifel's Jordan Rohan points out if we look out to his 2015 estimates, Facebook is trading at a slightly lower EBITDA multiple than Google -- 10 for Google and 9.4 for Facebook -- even though Facebook is expected to be growing a lot faster in the coming years.

He's right, but we also have to remember that Rohan downgraded Google two years ago on fears of the Facebook threat. It's a theme that may come into play eventually, but for now Google's the one trading near last month's all-time high.

Facebook may one day be more powerful than Google if it's able to effectively monetize its growing Rolodex of knowledge on its billion active users without alienating them. However, Zuckerberg also has a higher risk of obsolescence than Big G.

For now, the best bet has to be on Facebook having a merrier shareholder meeting next year. The stock's valuation is still not cheap, but it's no longer ridiculous. Facebook is just starting to monetize mobile and video monetization will inevitably follow. The next few quarters should be strong, and Facebook will naturally get a boost when it's added to the S&P 500 later this year.

Zuckerberg's probably just hoping that a better stock price brings out better questions from its investors next year.

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The article Facebook Needs Smarter Investors originally appeared on Fool.com.

Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. 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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