For many, Wednesday represents the first day of summer. But for Facebook Inc (NASDAQ:FB), it may mean the new season could bring good times for the company.
During the last five trading days, its stock has jumped more than 16 percent, according to the Los Angeles Times; on Tuesday, it closed at $31.91.
Quite a turnaround for a stock kept that diving in the first few weeks after its IPO.
So where is the increase coming from? Analysts says it’s from Facebook’s revenue growth. Investors are also confident in the stock, helping the price to rise. And short sellers have left the building.
As of May 31, about 8.1 percent of the 421 million shares from Facebook’s IPO had been sold short, according to Reuters. As compared to its Internet brethen who have hit the public markets within the last year, this comes in lower than Pandora Media Inc (NYSE:P), LinkedIn Corp (NYSE:LNKD), Angie’s List Inc (NYSE:ANGI) and Groupon Inc (NASDAQ:GRPN)
But back in its 2004 IPO, Google Inc (NASDAQ:GOOG) did have higher numbers than Facebook in the first weeks after its IPO.
However, short sellers after having an initial opportunity to grab a profit from negative market for the stock and its lofty valuation, may have exited with the stock’s decline.
Jay Ritter, a University of Florida IPO expert looked at Reuters’ numbers and said, “The opportunity to make money on short selling is greatest when a stock is overvalued. As the stock falls, it suggests“time to take profits” as “the possibility of a further decline becomes smaller.”
Get Ready for Recommendations
A clearer picture may be painted for Facebook’s stock when Wall Street analysts start rolling out their recommendations. Banks, who participated in bringing the company public, have a 40-day waiting period from an company’s IPO date before they can start rating a company.
This deadline is nearing its end and soon Morgan Stanley Inc. (NYSE:MS), Goldman Sachs Group Inc. (NYSE:GS) and JPMorgan Chase & Co, (NYSE:JPM) who participated in the IPO, can give their two cents on Facebook’s future. Analysts already covering the company think this could give the stock’s price a bump.
Brian Wieser, an analyst with Pivotal Research Group said to the Los Angeles Times, “There was anticipation that more positive noise will be in the marketplace.” Most banks who will begin coverage will probably “emphasize the positive aspects of Facebook’s story.”
He added, “They’re going to be very careful to dot their I’s and cross their Ts. 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.”
Helping matters for the company is some good Facebook developments such as its plans to translate its large user base and plethora of data into revenue. It has been publicly vocal about its intent to monetize its service.
This makes investors happy; analysts are already positive.
Mark Harding, a JMP Securities analyst, placed an “Outperform” Facebook rating on Facebook. This came from the company becoming “more vocal” regarding its efforts to expand revenue. He said, “People are starting to recognize that there is underlying value of the user base.”
Advertising Could be Key
Actions have been speaking louder than words and recently a ComScore report said ad campaigns on Facebook increased purchases for fans of brands including Starbucks and Target.
Wieser noted Facebook will now allow advertisers to real-time bids on ad space, further increasing prices. When Facebook had its IPO, the analyst had a “Sell” rating on it but has since changed it to “Hold” with a $30 price target.
He said, “These initiatives suggest they are doing things to generate revenue, and that’s not necessarily a given with Facebook.”
And another optimistic analyst is Needham & Co.’s Laura Martin; she has a “Buy” rating on the stock with a $40 target price. She sees advertising, which represented 85 percent of Facebook’s $3.7 billion 2011’s revenues, is a possible source for money.
She said, “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.”
However, the company still seems extremely over-valued according to almost any metric used.