Facebook for Dummies: Wait for $25

NEW YORK (TheStreet) -- You never get a second chance to make a first impression. If that first impression left little to be desired, why would anyone in their right mind care to revisit it anyway? It doesn't really make sense. Instead, the focus should be on fixing the mistakes, not fixing the broken pride.

No stock on Wall Street has taken a bigger hit to its pride than that of social media giant Facebook ( FB) and the pathetic first impression that it has made as a public issue. The question for investors continues to be, when will this horrific nightmare end?

It is one thing for investors to have lost money on the stock, but it's another to be kicked while you're down and be reminded daily, by people like me, that you have lost money. But the excuses continue.

Investors are now quick to introduce logic into the equation, suggesting that the stock's precipitous decline doesn't make sense. In fact, it makes perfect sense -- perhaps what we are now witnessing is the only thing that has made any sense at all throughout this entire episode. Because it not only teaches Wall Street an important lesson in humility, but it also reminds investors that there is nothing that is so-called "bigger than life."

The idea that "logic" should somehow matter at this point is funny (if not) ridiculous. The cynic in me wonders why focus on logic now to solve a valuation problem that was not based on logic to begin with?

However, the good news for investors is that, though the stock continues to drop, it is not going to zero. They should find some comfort in that. In fact, with its Wednesday close of $28.19, it had only 11.31% lower to go before it triggered my buy signal at $25. Today, it's even lower, near 27!

At $25, I plan to go all in and new investors should consider doing the same.

Not only is $25 where it should have opened its IPO to begin with, but from a technical perspective, this is where it will most certainly see a significant amount of support by virtue of its forward P/E.

While this is not based on absolute logic, it is firmly grounded in investor psychology -- one that has taken over a declining euphoria coupled with unmet expectations and applied the same punishment to two other similar IPOs: Pandora ( P) and Groupon ( GRPN). Facebook, so far, has shown to be no different.

Investors quickly forget what Pandora went through and how popular it was. When on June 15, 2011, the company first went public and the stock opened at $20, reaching its all-time high at $26 and ending its first public session at $17.35.

However, questions were raised regarding the company's ability to ever earn a profit, since it had not been able to accomplish that feat the 10 years prior, as a private entity. Today Pandora is finding that it is in a highly competitive landscape and trades in a market that is anything but forgiving. Since reaching $14.75 on Feb. 6, the stock is down 30%, and 66% off its 52-week high.

On Tuesday, investors were met with fears that Samsung may enter the mobile music business to compete head-on with the likes of Pandora and Sirius XM ( SIRI). As excited as the market was with Pandora's IPO, investors have quickly turned away, waiting for the company to prove that it does have a business that is sustainable.

Groupon was another popular IPO; it is currently trading at its 52-week low. The company provides a way for users to purchase deeply discounted vouchers for use at local businesses such as restaurants and salons. Does that make it a good investment?

It first opened for trading on Nov. 4 at $20 and reached an all-time high of $31.14, while closing respectably at $26.11. But unlike Pandora, it did not take long for panic to set in as the stock quickly dropped to the low teens of $14.85, only a few weeks after first going public. Today the stock trades at $11, down 60% since reaching $25.84 on Feb. 8, and down 67% from its 52-week high.

What investors quickly realized is that not only are its chances of earning a profit more in doubt, but competition is exceptionally fierce among existing titans such as Google ( GOOG) and Amazon ( AMZN). Clearly, it would take little to no investment at all from either of those two names to launch a competing product to squash Groupon's chances of survival. As with Facebook, its business model was relatively new, but investors placed more value on the idea rather than the business.

Bottom Line

Facebook has the advantage that the others didn't -- it had the laws of large numbers on its side. It does not have to deal with the start-up concerns of "if we build it they will come." It has 900 million people already at its doorsteps and its only challenge is figuring out a way to get money from them. But that is not as easy as it sounds. However, one would think that with as much information that Facebook has on each person, it would be a piece of cake.

So with the fact that it knows how much money I have and where I love to spend it, and yet can't use that information to its advantage, is that really a smart company after all? Be that as it may, the odds are that Facebook will figure this stuff out, it just needs some time. But in the interim, there is less risk at $25 and where I suspect that my bag will start being filled with some decent returns.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, Saintvilus was long CSCO.

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