Should You Buy Or Sell the Facebook Inc (FB) Rally?

Facebook Inc (NASDAQ:FB) seems determined to claw back to a reasonable performance before 2012 closes. In the last month, the stock is up almost 40%- against a 5% rise in the NASDAQ index- though it is still about $10 below its IPO price of $38. The tone of coverage of the stock has begun to shift from “failed IPO” to “company that is waking up and realizing that it needs to make money”- though we’re not sure whether that shift has been driven more by actual news and developments, or by the increase in the stock price itself. Read about e-commerce opportunities at Facebook and Facebook’s potential plans to develop its own games.

The results for the third quarter of 2012 suggest that Facebook Inc (NASDAQ:FB) has far from a revenue problem: the company reported a 32% increase on the topline from the same period in 2011, roughly in line with the growth rates from the first half of the year. Costs have been more of an issue, as pretax income came in about flat. Much of this was due to increased share based compensation; this came in $100 million higher for the quarter than a year earlier, and was particularly notable in explaining the rise in R&D cost. If we strip out share based compensation, however, operating costs were still up 50%- not a good point.

With its market capitalization back above $60 billion- despite net income being technically negative for the year- Facebook Inc (NASDAQ:FB) trades at 43 times analyst consensus for 2013 earnings. Specifically, expectations are for 65 cents per share in earnings; even if the company achieves that target, the multiple looks high unless earnings growth is very, very good. While short interest seems to have cooled about, about 12% of shares outstanding are held short. There have also been insider sales at Facebook (see a history of Facebook’s insider sales). Chances are that this doesn’t mean anything, as it is usually rational for insiders to sell stock- insider sales actually aren’t that predictive of anything for this reason- but it is at least possible that some insiders don’t like the valuation.

Technology and services focused hedge fund JAT Capital Management, managed by John Thaler, owned 6.2 million shares of Facebook Inc (NASDAQ:FB) at the end of September (check out Thaler’s favorite stocks). Tiger Cub Andreas Halvorsen’s Viking Global initiated a position in the stock during the third quarter (find more of Halvorsen’s stock picks).