Facebook Fixin’ to Bite Bears

Focus: STOCKS

Igor Greenwald Image Igor Greenwald Chief Investment Strategist, MLP Profits

The stock is much cheaper than a month ago, and sentiment toward it has turned ugly, setting up a tradable rally, writes MoneyShow.com senior editor Igor Greenwald.

Nearly four weeks ago, on the morning of Facebook’s (FB) ill-fated public offering, I called the IPO “dangerously overpriced,” and warned that the company lacked sufficient growth prospects to justify its “nosebleed valuation.”

This was before the Nasdaq (NDAQ) bungled the initial order crush, saddling many eager buyers with lots more shares than they wanted. The stock hadn’t yet dropped 15% from the day’s highs to close barely above its offering price.

The shares would go on to slump 32% below that offering price over the next three weeks, rewriting the movie script from “Awkward Genius Conquers the World and Marries the Girl” to “Wall Street Screws Mom and Pop, Part 97.”

So here we are, and none of my long-term reservations have really changed. If anything, Facebook’s struggles to monetize its vast user base via ads have received more skeptical scrutiny as its shares sank.

Its decelerating revenue growth and negative cash flow have been masticated into bearish gruel. New concerns about recent declines in the number of users playing games hosted by key Facebook partner Zynga (ZNGA) will only add to investors’ apprehension.

The next earnings report, the one for which the underwriters of the IPO have already cut estimates as if on cue, is still nearly two months away, to be followed in August by lockup expiration that will boost the public float by two-thirds.

So why do I believe that the path of least resistance for the stock over the next month is higher, perhaps significantly so?

Start with the valuation: Facebook’s market capitalization is down from $81 billion at the offering price, and $96 billion at that day’s high, to a considerably more reasonable $59 billion as of Tuesday’s close.

This values Facebook at 51 times this year’s estimated earnings and 42 times next year’s expected earnings-per-share.