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Reaching Bottom: Why I've Finally Bought Facebook

Stocks in this article: FB P LNKD RIMM

NEW YORK ( TheStreet) -- I did something Wednesday that I didn't think I was ever going to be able to do. Not only did I establish a position in social media giant Facebook (FB), but I did so while feeling good about the decision.

As a value investor, trying to convince myself that the company was worth the investment came as quite a challenge. I'm not entirely convinced of the overall value of social media. Be that as it may, I do understand that on Wall Street everybody takes a beating once in a while, and this time it was Facebook's turn.

Facebook shares hitting $25 could be a buy signal for wise investors.

I have also come to understand that Wall Street can sometimes have a very short memory; not only does a beating stop, but everyone starts using the word "cheap" as a way to rationalize what has really become a change in sentiment.

The question is: Has Facebook become cheap, and did it in fact reach its bottom? Although it is hard to say with any degree of certainty absent more historical trading data, I have reason to suspect it has, since $25 has been my fair market value since its IPO.

If $25.52 was its bottom, where is it heading next? According to Mark Harding of JMP Securities, the next target will be $37 -- or $1 short of its IPO price while initiating coverage of the company with a market outperform rating. He says the "valuation appears high, but Facebook has plenty of opportunities to monetize its vast user base." That's not entirely a revelation; the company's IPO valuation was heavily predicated on that assumption. But can it execute? And if so, how?

With Harding thinking the company has 42% upside from current levels, I have started to compare Facebook's bottom with that of its closest peers upon their IPOs. These include Pandora (P), LinkedIn (LNKD), Zynga (ZNGA) and Groupon (GRPN). What I have found were pretty consistent patterns, some suggesting Facebook is going to be just fine in the long term. One such example was Pandora, which opened for trading June 15. The stock started off at $20, reached the company's high at $26 and finally ended its first session at $17.35. Today the stock is trading just under $11 as investors start to apply more conventional valuation methods to its business model.

The good thing for Pandora is that it is growing its revenue and has even earned a profit, when many were quick to proclaim it couldn't. Like Facebook, Pandora is in a business heavily predicated on growing advertising revenue. To its credit, it has been able to do that despite increased levels of competition. Interestingly, Pandora is one of a couple of companies I think would help Facebook grow via an acquisition if it were to truly approach that $37 valuation. The more I think about it, though, the more realistic $37 now seems, as it may possibly follow the path IPO path of LinkedIn.

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