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Facebook Stock Stages Remarkable Recovery

Henry Blodget
Tuesday, 11 Dec 2012 | 3:28 PM ET

A few months ago, Facebook's IPO was an unequivocal disaster.

Priced at $38 in May, the stock (FB) had fallen more than 50% to the high teens, and many pundits were predicting that it would fall all the way to $10.

That was then.

Now, Facebook is in the high $20s again, driven by renewed enthusiasm for Facebook's long-term growth opportunity.

Specifically, investors are excited about three things:

1. Facebook's new mobile advertising units, "Sponsored Stories," appear to be doing well. Many anecdotes suggest that Facebook's users are "engaging" with the ads and that Facebook will be able to build a huge business out of mobile.

2. Facebook's new ad network, which allows the company to target ads within Facebook based on a user's behavior outside Facebook's walls, is also doing well. Early advertisers are seeing excellent returns on their spending using this new targeting system, and Wall Street believes this could be another big growth engine.

3. The insider "lockup releases" that allowed early investors and employees to sell have mostly run their course, and the stock has held up.

Ultimately, Facebook will likely trade at the same ~15X earnings multiple that Apple, Google, and other tech bellwethers trade for. And given that Facebook is now trading at ~45X next year's expected earnings, there's significant downside to the stock.

However, if Facebook's revenue growth significantly re-accelerates, investors will likely be willing to overlook the high multiple and invest on "momentum." This is a dangerous game -- if the company falters, the stock will tank -- but as long as the momentum continues, the stock could continue to do well.

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