Facebook: Are We There Yet?
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After dipping below $18, Facebook (NASDAQ: FB) shares are finally showing signs of life, closing out the week back up to $22. Despite the positive bump for the stock – over 6% of which came during Friday’s session – the question now becomes one of distinguishing between a mid-slump bounce and a real reversal. Ultimately, while Facebook will almost certainly have a bright future someday, there was too much background noise this week to justify buying the stock without a longer demonstration.
The Perfect Storm for a Tailwind
Last week proved to be one of the more news-rich weeks of the last few months. Between the release of Apple’s (NASDAQ: AAPL) iPhone 5 and Bernanke fueling his helicopters for an unprecedented next round of quantitative easing, there was plenty for investors to get excited about. It was against this backdrop that Mark Zuckerberg took to the stage in a rare public appearance. In his address, he dealt with topics ranging from Facebook’s continuing push into the mobile space to the progress achieved with The Facebook Ad Exchange. The speech took place on Tuesday and by the end of the week, the company’s market capitalization had climbed by nearly $6.8 billion.
While the speech itself was a positive catalyst that highlighted critical areas of focus for Facebook (see below for more), there was tremendous upward momentum in the market anyway. As is the case with every big release from Apple, investors were poised to be wowed as the new device was revealed. This type of event creates an unconscious favorable bias for technology stocks already, but the inclusion of more deeply integrated Facebook features in the iPhone 5 can be seen as a potential price driver.
With things humming going into Thursday, the Federal Reserve announced not only its plan to begin a third round of quantitative easing, but the mechanism by which it will spend $40 billion per month until the employment picture clears up. The news took all of the major indexes significantly higher and set a positive tone for stocks overall. Without buying too heavily into the adage that “a rising tide lifts all boats,” distinguishing what really drove Facebook’s performance is premature until we see if the stock can follow through well into the week after.
Real Positives For Facebook
In legitimately positive news for Facebook, the Ad Exchange seems to be showing promise. The single largest issue plaguing the social media giant is its ability to monetize its considerable membership numbers. The Ad Exchange is no longer in the testing mode and preliminary live tests show that for the first time advertisers may be able to target ads based on users' Facebook browsing history. The concept of tying ads to browsing history is not new, but the ability to incorporate Facebook data into the process could be a major step forward for advertisers.
As some further evidence that the company is turning a corner, Google (NASDAQ: GOOG) subsidiary Wildfire just recommended that its clients buy ads on Facebook, rather than relying on free options. Wildfire specializes in social media marketing management, making the endorsement a serious one. The fact that parent Google is a rival makes the recommendation even more interesting. To take the news the final step to investment-worthy, in the speech mentioned above, Mr. Zuckerberg hinted that Facebook may venture further into the search market in the near-term.
While Facebook had its first really good week since the stock debuted, the overall market positives were too great to convince me that Facebook is a safe play yet. There is no doubt that the company will find a way to remain relevant as its get further into the mix, but this warrants a multi-year allocation, not a near-term trade. Before Facebook should be considered a legitimate buy contender, it needs to show some follow through and remain stable without all the help. At current levels, Facebook is a speculative play or a hold.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Google. Motley Fool newsletter services recommend Apple, 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.If you have questions about this post or the Fool’s blog network, click here for information.