After bottoming in early September last year, shares of Facebook (click ticker for report: ) have been off to the races, climbing back to over $31 at a rapid pace. The company is still trading below its initial offer price, however.
The big jump has been (in part) a result of the company reporting a tremendous jump in mobile revenue, and thus far, we’ve seen Facebook prove to be one of the best companies at profiting from the rapid shift from PCs to mobile. Without question, we think the good news about mobile revenue is a positive shift in fundamental data. However, we do not think such news is worthy of the incredibly positive price action. We continue to believe that fast-money traders and speculators are behind a lot of Facebook’s recent steam.
Interestingly, we think a lot of the momentum that was behind Apple’s (click ticker for report: ) strong fundamentals earlier in 2012 is now getting behind Facebook’s improved fundamentals. Yet, that’s no reason for us to change our valuation for Facebook (or Apple for that matter). Our outlook for the company is already fairly optimistic, though we could see upside to our forecast if mobile timeline ads continue to provide advertisers with an excellent return on investment (justifying superior prices).
Facebook also intends to make a big announcement this week, which we think might be a classic “buy the rumor, sell the news” situation. We don’t have any definitive information on what the company might announce, but we think the market is looking for a material announcement like a smartphone, decision to enter the search market, or Instagram monetization.
Though fundamentals have improved since the initial public offering, we think the stronger outlook is already embedded into our scenario analysis. Still, Facebook is not a stock that we’re averse to owning since its upside could be absolutely astonishing, but we see no reason to enter the name at this time (its downside risk remains relatively high at current levels). We won’t be adding the company to the portfolio of our Best Ideas Newsletter at this moment, but we’re watching it very closely.