What to do with Facebook stock amid mobile gains

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Facebook CEO Mark Zuckerberg.

Facebook appears to have turned the corner on its much-watched mobile strategy. But that development may not make the social-media giant a good investment now that the stock is back above its $38 IPO price, some pros say.

"The big overhang from the IPO day on this stock was mobile," RBC Capital Markets analyst Mark Mahaney told CNBC this week. "This company was caught flat-footed by this massive trend in the Internet space toward mobile usage. It took them four or five quarters to catch up, but they caught up—and extremely well."

That mobile gain has put Facebook in a better position than when it went public 14 months ago. At the time, its mobile ad revenue was nonexistent. In the second quarter of this year, such revenue reached 40 percent of total ad revenues, helped in large part by its ability to lure advertisers to its News Feed.

"I think if there was any skepticism that Facebook is a legitimate ad platform, that should be put to rest—over a billion users, most of whom use the site actively on a daily basis," said Colin Sebastian of R.W. Baird.

With investors more confident that Facebook has figured out how to monetize mobile, the stock has surged nearly 42 percent this year—most of that after second-quarter earnings. One of the few, big social media stocks to do better? LinkedIn, which has doubled this year. Smaller Yelp is up 180 percent.

But according to some market watchers, too much was made of Facebook's improvement. The company was simply moving forward on a broad growth model—nothing extraordinary in terms of a business strategy.

"I don't share the euphoria that people have about mobile monetization because I think they needed to do that," said Aswath Damodaran, a professor at New York University Stern School of Business. "If they hadn't done it, it would've been disastrous."

Better financial prospects may not mean a better stock investment.

Mahaney at RBC said there's a lot of fundamental upside to Facebook as it continues to monetize its mobile user base and rolls out products such as video ads. But the stock is "a small buy here," he said.

He sees better opportunity in Google. The search engine has solid growth prospects and is a good value.

"Google you have a 15 percent to 20 percent earnings grower that you can buy at a modest premium to the market on 18 or 19 times earnings," Mahaney said. "That with a two-year perspective is probably your safer buy."

Damodaran, who focuses on investment valuation, is more bearish. Facebook is too richly valued at $38, he said, adding that his work suggests that the shares should trade at $24 to $28.

(Read more: Facebook stock is 'richly priced')

There's even a technical case to be made for Facebook's rally to sputter now that the stock is back at its IPO price, said Carter Worth, chief market technician at Oppenheimer. A lot of angry shareholders want their money back after enduring the stock's yearlong swoon.

"You have to be concerned with overhead supply" of Facebook shares, Worth said. "So day-to-day, we think there's little upside. It will be stuck here for weeks at least."

Despite such skepticism, Facebook still has fans. Bullish analysts and investors argue it has proven staying power and is poised to benefit from the ongoing move to mobile.

Aaron Kessler of Raymond James called Facembook his top large-cap pick in the Internet space and sees the potential for estimates to move higher given the improving ad revenues.

Facebook shareholder Larry Fishelson of Dynalink also is bullish and expects the stock to reach $50 this year.

"A lot of people stay away from tech investing because it's about the new-new product," he said. "This is evergreen advertising, e-commerce, and it will continue to drive. Time to get in."

He doesn't view Facebook as a trade but as a long-term investment.

"If everybody is trying to figure out, 'How are they getting into mobile?' 'What are they doing?'—that's the time to buy," Fishelson said. "You don't want to buy when everyone figures it out."

Youssef Squali, an analyst at Cantor Fitzgerald, is not giving up on Facebook, either.

"We're not ready to jump ship, only because the story keeps getting better both on what they're going on mobile, which has been incredibly impressive, and what I think they're going to end up doing on video," he said.

Squali expects mobile revenues to reach $1 billion in the fourth quarter, compared with a little over $600 million in the second quarter.

"That growth rate alone should make a lot of investors think again about maybe not selling here and hold on a little more," he said.

Nonetheless, Facebook looks a bit pricey trading on 40 times next year's estimated earnings versus a mid-teens multiple for the S&P 500. Squali said that means the company will need to execute to justify a much higher stock price.

—By CNBC's Justin Menza. Follow him on Twitter @JustinMenza.

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Disclosures:

Raymond James makes a market in Facebook securities.

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