Facebook: Just the Facts

NEW YORK (TheStreet) -- Everyone has an opinion on Facebook (FB), and the major opinion is that one billion people just can't be wrong.

That being said, you need to evaluate where to put your hard-earned investment dollars using the best facts available, not the opinions of the one billion Facebook users, very few of them being owners of the stock.

Before we discuss FB and its initial public offering, just a little primer on IPOs in general.

If you have a privately held company that you want to take public your goal is to maximize the money you get for selling out your stock. You as an insider know the score and you look for an underwriting group that is going to get you whatever the market will bear.

Your underwriting costs are normally between 4% and 8% of the offering proceeds, so the day after the IPO the stock is technically worth 92 cents to 96 cents on the dollar. Most of the time the underwriting group agrees to support the price until the stocks price becomes stabilized but normally about 90 days.

This is done so most investors won't get burned and will take a chance on this unproven stock. If the price goes up it can be sold at a profit, but since there is price support there is little downside risk.

In the case of the Facebook IPO, in March it opened at $38, flew up to $45 immediately and once everyone tried to dump the stock for a quick profit they soon found out the underwriting group did not agree to price support. The stock tanked to a low of $17.55.

At the present time the stock seems to have stabilized in a narrow trading range, as you can see buy this 14-day turtle channel graph and 20- and 50-day moving averages provided by Barchart:

Now that the stock has apparently bottomed out, let's try to see where it might go from here:

Facebook operates as a social networking company worldwide. The company builds tools that enable users to connect, share, discover and communicate with each other; enables developers to build social applications on Facebook or to integrate their Web sites with Facebook; and offers products that enable advertisers and marketers to engage with its users. As of Feb. 2, 2012, it had 845 million monthly users and 443 million daily users. The company was founded in 2004 and is headquartered in Menlo Park, Calif. (Yahoo Finance profile)

Factors to Consider:

Technical indicators provided by Barchart:

Barchart does not give buy/sell indications until there is six months of data to evaluate, but in the past month the stock has moved up 7 times for a gain of 8.64%. The price is still 54.18% below its one-year high of $45.

The stock trades above its 20-day moving average but below its 50-day moving average. Its Relative Strength Index is still below 50% at 46.18%. It recently traded at $20.61 with a 50-day moving average of $20.58.

Fundamental Factors:

The stock gets a lot of press hype, and 28 Wall Street brokerage firms have assigned 38 analysts to run the company's numbers. They project revenue will be up 32.4% this year and another 28.2% next year.

Earnings are estimated to increase by 11.6% this year, 29.6% next year and continue to increase at an annual rate of 27.23% over the next five years. The financial strength is good with a B+ rating.

The company recently passed the one billion-subscriber level so it receives one of the highest page views on the planet. The major concern is that as the users move their site access from their larger-screen computers to their smaller-screen mobile devices, how will the company position the advertisements on the screen to fund those revenue and earnings projections?

The $64,000 question is, will the costs of technological improvements needed to keep the site attractive to users and attract advertisers be cost effective. Page views will increase but will advertisers get their bang for the buck and you as an investors own a profitable company?

Investor Interest:

Wall Street analysts are interested, positive and have issued eight strong buy, 14 buy, 15 hold and one underperform recommendation to their clients. Analysts project if their numbers are correct investors at this level should see an annual total return in the 18% to 22% range over the next five years.

I use the readers of Motley Fool to gauge the sentiment of the average individual investor and they strongly disagree. The 1,414 reader that gave their opinion only gave the stock a 49.78% vote of confidence to beat the market. While Cantor Fitzgerald, Piper Jaffrey and Normura are still positive, Jim Cramer has his reservations.

Conclusion: At the present time Facebook continues to be a speculative play for traders, not a calculated risk for investors. Although the price has appeared to have bottomed out, no one can forecast if the company will be able to monetize its page views at a faster rate than it can spend for the R&D costs necessary to compete for users.

My personal opinion is that Mark Zuckerberg has proven himself to be the smartest techno-geek around but has yet to prove he has the business skills to run an S&P 500 company.

Investors should look elsewhere for investments, and traders and speculators should review the turtle channel graph above to see if you want to place a bet at this time.

At the time of publication the author had no position in any of the stocks mentioned.

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

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