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With Another Lockup Past, Is Facebook Inc (FB) A Buy?

Facebook Inc (NASDAQ:FB) bears were licking their chops as a crucial lockup period expired in mi-November. Surely Facebook insiders, having seen the stock fall about 50% since the IPO, would take advantage of the ability to cash out more of their shares and put strong downward pressure on the stock.

Then that didn’t happen. In fact, Facebook Inc (NASDAQ:FB) is up 11% so far in November, with a stock price nearing $24 per share; this puts it at about its highest level since July. In the third quarter, Facebook’s revenue was up 32% from the same period in 2011. The company reported negative operating income for the quarter due to much higher costs, including a doubling in research and development (though most of the increase in costs at that department was higher share-based compensation). Cash flow from operations has slipped only 10% in the first nine months of 2012 compared to the same period last year. Facebook Inc (NASDAQ:FB) reported particularly strong revenue numbers in the U.S. and is also seeing growth in international markets.

Facebook’s market cap has crossed above $50 billion, and therefore the trailing P/E multiple is well over 100. Share based compensation has likely caused earnings at Facebook to be lower than they otherwise would have been, and the company is growing, but that’s a quite expensive multiple. The forward P/E is 37, and again that’s quite high- many market participants apparently agree, as the most recent data shows that 19% of the shares outstanding are held short. We recently looked at one analyst who has a price target of $16 on Facebook Inc (NASDAQ:FB) shares. See why Rich Greenfield is advising selling Facebook. We’re not sure about shorting, but we certainly would advise against being long the stock at these prices.

Andreas Halvorsen

Some hedge funds have been more bullish on the stock. Tiger Global owned over $250 million worth of Facebook Inc (NASDAQ:FB) stock at the end of September, going by prices at that time (read about changes in Tiger Global’s portfolio during the third quarter). Tiger Global is one of the “Tiger Cub” hedge funds. Another of these funds is Andreas Halvorsen’s Viking Global; Halvorsen and his team reported 4.2 million Facebook shares in their portfolio for the third quarter. Find more stock picks from Andreas Halvorsen and Viking Global.

Facebook can best be compared to Google Inc (NASDAQ:GOOG) and Linkedin Corporation (NASDAQ:LNKD). LinkedIn continues to report spectacular revenue growth, and earnings are picking up as well, though the company’s valuation is even higher in multiples terms than Facebook’s: it trades at 81 times consensus earnings for 2013. We don’t think that it’s a good value and would avoid it as well- if anything, it might be a better short candidate than Facebook is. Google took a hit to its earnings in the third quarter, with net income being down 20% from the same period a year ago as the Motorola Mobility Holdings hasn’t contributed much to the bottom line so far. We like Google’s growth prospects, both from improving that division and from continued better performance in search-related businesses, but at 20 times trailing earnings we wouldn’t say that it’s undervalued either.

We’d also consider Zynga Inc (NASDAQ:ZNGA) and Renren Inc (NYSE:RENN) to be Facebook peers. Zynga is expected to earn only 2 cents per share in 2013, and Renren is expected to be unprofitable  (that is the consensus for this year as well). Zynga’s revenue is only up slightly as changes to Facebook’s interface have made it more difficult for social games to attract users; its recent game development has not been successful either. Renren’s revenue grew 47% last quarter compared to Q3 2011, though the Chinese social networking company has considerable political and macro risk. It’s probably best to stay away from these stocks as well.

We don’t consider Facebook or any of its peers to be a good value right now. Even after the supposed “popping” of the social bubble, multiples remain high and we don’t feel confident that their valuations will be supported by growth.

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