Why Analysts Suddenly Say Facebook Is a ‘Buy’

Why Analysts Suddenly Say Facebook Is a ‘Buy’

REUTERS/Thomas Hodel

You’ve gotta believe that Mark Zuckerberg is biting his tongue and fighting the urge to holler “I told you so!” at the top of his lungs right about now. Instead, in discussing Facebook’s (FB) third-quarter results on Tuesday, the 28-year-old CEO confined himself to dubbing reports that the company will struggle to make money from its mobile app a “myth,” and argued that “over the long run we’re going to see more monetization per time spent on mobile than on desktop.”

Certainly, the numbers announced after the market’s close yesterday seem to confirm Zuckerberg’s optimism – and could put an end, for now at least, to calls for him to step down from his post running the company on a day to day basis in favor of a job where he could think deep thoughts and dream up new applications. Those intensified after the company’s previous quarterly earnings revealed that Facebook was battling to make the mobile app pay off in terms of advertising revenue.

But the third-quarter results showed that Facebook pulled in some $153 million, or about 14 percent of its total advertising revenue, from mobile ads. Not too shabby for a category of advertising that is still in its infancy – and one that is still confounding many other companies, including Google (GOOG). The results prompted analysts at Stifel Nicolaus, Merrill Lynch and Citigroup to all upgrade their ratings on Facebook from “Hold” or “Neutral” to “Buy.”

The growth in mobile is also a reminder not to judge any CEO of a newly public company on earnings or share price in the first 100 days of his tenure, especially when that company is Facebook, whose IPO may be the most bungled deal of its kind in the last decade.

It’s impossible to tell how much of the slump in Facebook’s share price since that IPO can be linked to bona fide anxiety about the company’s strategic challenges and financial performance, and how much is tied to investors’ fears that there are still a lot of disgruntled investors who got stuck owning the stock at a higher price and are anxious to unload it.

“With hundreds of millions of shares locked up until next week, many of them likely to be sold into the market, there was always significant concern that the lock-up expiration would lead to a material decline in the stock if new investors did not arrive to purchase those shares,” analyst Brian Wieser of Pivotal Research Group wrote in a note to clients Tuesday evening. Wiser upped his price target from $28 to $30 while maintaining his rating, which had already been a “Buy.” Facebook’s accelerating ad revenue could lure those investors on the sidelines, Wieser wrote, adding that, “as sentiment improves, shorts may also begin covering their positions, adding to upside pressure on the stock.”

What is clear is that yesterday’s earnings announcement removed a load from investors’ minds and propelled the stock more than 20 percent higher in Wednesday morning trading to about $23.50 a share. That gain came on top of an advance of nearly another full percentage point during what proved to be Wall Street’s worst trading day in more than four months, one that left the Dow Jones Industrial Average down 243.36 points, or 1.8 percent, and the S&P 500 struggling to keep its own loss to 1.44 percent.

The apparent contradiction is a reminder that it’s going to take the kind of news that Facebook delivered late yesterday – results that change the consensus view of the company and its prospects – to move an individual stock higher in the current market environment.

Once more, the pendulum has swung firmly in the direction of “risk off,” as weak earnings reports from the likes of United Technologies (UTX) and DuPont (DD) wreaked havoc on investor confidence.

In this environment, even companies that simply manage to beat analysts’ expectations may not find themselves rewarded with a jump in their share price. In part that is because those analysts have been busy trimming their forecasts for corporate profits with every week of the third quarter that passed, so that simply “beating” a much lower number is less of an achievement than delivering a real positive surprise or somehow fundamentally challenging the market’s established view of a company.

Of course, yesterday’s results don’t mean that Facebook is out of the woods, either. There is still plenty of room for them to disappoint and lots of potential for existing shareholders to respond to the surge in the stock price by dumping some of their holdings. But Facebook has changed the conversation about its mobile future. Wieser suggests that the questions surrounding Facebook’s ability to monetize its mobile platform “may be put to rest with these figures.” They are, at least for now.