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Facebook investors moving back into 'Like' territory

Facebook shares have risen to $32, from a low of $26, as investors react to the 'underlying value of the user base,' an analyst says.

June 20, 2012|By Ryan Faughnder, Los Angeles Times
  • Facebook's IPO price was $38, but shares fell to a low of $26. Now they're trading around $32 as analysts and investors respond to the social media giant's plans for growth.
Facebook's IPO price was $38, but shares fell to a low of $26. Now they're… (Carolyn Cole, Los Angeles…)

Investors in Facebook may finally be getting a break.

The social media giant's stock has climbed more than 16% over the last five trading days to nearly $32. It marks a big turnaround from the weeks following the botched initial public offering in which shares plunged.

Increased confidence in Facebook's revenue growth may now be giving the stock a lift, according to analysts. And investors are betting that the stock will continue its run in coming days as analysts at major Wall Street banks initiate coverage of the company.

"We've pulled a 180," said Ryan Detrick, a senior technical strategist at Schaffer's Investment Research.

In fact, Detrick said, there's already an indication that the stock will go higher judging from the options market. Traders were originally bearish in May on the prospects for Facebook shares but have grown more optimistic in the last three to four days, he said.

Many investors grew skittish after Facebook shares briefly spiked to $45 on its May 18 trading debut and then closed barely above the IPO price of $38. It dropped below $26 a share June 5, down 31.5% from the IPO price.

The real test for Facebook investors will come as analysts at the big Wall Street firms release their recommendations on the company. Banks that bring a company public must wait 40 days from the IPO date before they can begin rating the companies.

About 30 Wall Street heavyweights including Morgan Stanley Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. that participated in the IPO will soon be able to weigh in on the future of Facebook. Analysts who currently cover the company believe this could boost the stock price.

"There was anticipation that more positive noise will be in the marketplace," said Brian Wieser, an analyst with Pivotal Research Group. Most of those initiating coverage would likely "emphasize the positive aspects of Facebook's story."

But he believes some investors might already be piling into the stock ahead of the new round of Facebook stock ratings.

Facebook was awash in negative publicity after its IPO, especially after reports emerged that lead underwriter Morgan Stanley had whispered that Facebook wasn't a good buy before the shares went public, for example. The investment bank has denied those allegations.

Despite caution after the initial dose of negative publicity, most new analysts will have positive things to say about the company, Detrick said.

"They're going to be very careful to dot their I's and cross their Ts," he said. "That's the name of the game, to get people to invest. They're going to try to make sure there's an image that's a little positive."

Analysts say there have been recent positive developments for Facebook — including talk of plans to translate its massive user base and troves of data into revenue.

Facebook has become more aggressively public about its intention to monetize its service. That emphasis is encouraging to investors, analysts said.

Mark Harding, an analyst at JMP Securities, has an "outperform" rating on Facebook stock. He noted the company has become "more vocal" about its efforts to grow revenue: "People are starting to recognize that there is underlying value of the user base," he said.

Facebook has recently been touting a report from ComScore that said ad campaigns on the social media site boosted purchases among fans of many brands such as Starbucks and Target.

Wieser noted Facebook will now allow advertisers to bid on ad space in real-time, which could drive up prices. At the time of the IPO, Wieser had a "sell" rating on Facebook but recently switched to "hold." His target price for the stock is $30.

"These initiatives suggest they are doing things to generate revenue, and that's not necessarily a given with Facebook," Wieser said.

Laura Martin, an analyst with Needham & Co., has put a buy rating on Facebook and a target price of $40 a share. She said advertising, which made up 85% of Facebook's $3.7 billion in revenue last year, is only one potential source of money.

"It's a platform over which revenue can be generated, not only through ads, but through e-commerce and online payments like a PayPal system," Martin said.

Another investor concern is that a lockup on stock held by original shareholders and Facebook employees will expire over the course of the next year. That could release 1.8 billion additional shares into the market.

"That concern is part of the overhang on the stock," Harding said. "You could have them dumped on the market, or it could be done in a more orderly fashion."

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