NEW YORK (TheStreet) -- After the biggest initial public offering in history, Facebook (FB) has disappointed investors large and small. Zynga (ZNGA) Facebook's big driver in traffic, is performing more like a lead zeppelin than a Led Zeppelin.FB data by YCharts
Facebook is anticipated to report weak second-quarter earnings after the close on July 26. The consensus estimate is currently 9 cents a share. Based on $29 a share and 9 cents earnings for the quarter, the price-to-earnings multiple is over 80. I am not sure the International Space Station is at a much higher altitude. At the current level of profits, it will take over 80 years of earnings to pay for one share of stock. Facebook trades an average of 13.3 million shares a day with a market cap of $65.7 billion. Over half the analysts covering Facebook rate it as a buy or strong buy; 14 of the 27 analysts covering the company give a "buy" recommendation. 11 analysts rate it a "hold" and two recommend selling. Analysts are increasingly more bullish with Facebook; 12 out of 27 analysts now rate Facebook a "strong buy," up from six analysts a month ago. Compared to three months ago, even more analysts are rating this company as a "strong buy." The average analyst target price for Facebook is $38.50. At a price of $38.50, it will take over 100 years of profits to pay for one share. An investment in Facebook is an investment based on the company rapidly growing the bottom-line profits. I believe Facebook has room to grow revenue and profits, but expecting a fivefold increase is beyond my expectations. Facebook needs at least a fivefold increase to justify a price above $38.50. TheStreet's Harry Schiller
Zynga is the world's largest social game developer whose titles include CityVille, FarmVille, FrontierVille, Words With Friends, Mafia Wars, Zynga Poker, Cafe World, and Treasure Isle. Zynga trades an average of 20 million shares per day with a market cap of $3.6 Billion. Wall Street is expecting Zynga to report weak second-quarter earnings after the market closes on July 25. The consensus estimate is currently a loss of four cents a share. Last quarter Zynga reported 6 cents. The last quarter of 2011 was worth 5 cents in earnings. Two quarters aren't enough to extrapolate a pattern, but Zynga did beat estimates in both. ZNGA Free Cash Flow data by YCharts
If the short interest level in Facebook raised concerns, Zynga's short interest is frightful. More than one out of every five shares is shorted. Zynga has a 21% short interest level of the float. The positive aspect of a large short interest on a sub $5 stock is it sets the spring for a bounce higher. Zynga is a prime candidate for a classic old fashion short squeeze. (See my Apple preview
If Zynga blows the number away and puts 10 cents up on the board, the stock can easily double from here. Zynga will need to follow up with impressive guidance, but I have witnessed bigger surprises in my career. I don't believe the odds favor it, but it's a thought in the back of the minds of every short-seller right now. Technically the chart pattern is bearish (not hard to figure out when the price moves from the top left to the bottom right), but also nearing an oversold status as shares move towards $4. A strong down day with heavy volume may signal a bottom. Unless you're a short-term trader it doesn't mean much. Investors will want to focus on fundamentals and the earnings performance. Without a significant beat, don't look for this dog to hunt anytime soon. At the time of publication the author did not hold a position in any stock mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.