Don't Be Fooled By the Latest Facebook (FB) Rally

It appears that five months is enough time for investors to forget the lessons they learned from the Facebook.com Inc. (FB) IPO. Despite mixed reactions from the analyst community, Facebook stock soared over 20% yesterday after the social media giant reported third-quarter earnings results. But I don’t want you to get caught up in the hype, and here’s why:

While Facebook’s sales did jump 32% compared with the same quarter last year, earnings remained flat and they only topped expectations by $0.01. From most companies, these results wouldn’t spark nearly the kind of rally we saw with Facebook. But the fact is that Facebook is a highly shorted stock—short interest rose to 12% of freely traded shares in the past month.

Also, Facebook just doesn’t have enough earnings data to get my seal of approval. In this choppy market, it pays to stick with companies that have time-tested fundamental strength, not just one quarter of surprising growth. For that very reason, I don’t even add companies to my Portfolio Grader database until they have four solid quarters’ of earnings announcements under their belt.

And once we do get the four full quarters from Facebook.com Inc., I’m not entirely convinced that the results will be that pretty. This year, Facebook is expected to grow earnings by 16.3%—below the 21.7% industry average, so I don’t expect it to fare much better than its rivals. Take Chinese social networking company Renen Inc. (RENN), which is D-rated in Portfolio Grader, and U.S.-based LinkedIn Inc. (LNKD), which is C-rated. The fact is that social networking sites, Facebook.com included, are struggling to diversify their revenue streams—right now, they’re dependent on advertising revenues to stay afloat.

On that note, Facebook.com Inc. is facing a big problem when it comes to profiting off its entry into emerging markets. While North Americans and Europeans brought in average revenue of $3.40 per user (ARPU) and $1.37 respectively, Asia ARPU was $0.58; the rest of the world’s ARPU was just $0.47. This is a concern because these last two areas accounted for 81% of Facebook’s new monthly users. So while Facebook touts breaking through 1 billion monthly users, a good chunk of these users aren’t very profitable. Meanwhile, in the U.S. and Canada, which accounts for over half of revenues, membership has remained largely stagnant. Over the past year, daily active users have climbed just 6% to 132 million.

And then there are the lockup expirations.

Come Monday, $243 million insider shares will be eligible for sale for the first time ever. But the selling pressure sparked by this expiration will be nothing compared to a few weeks from now: On November 14, an additional $777 million will be unleashed. The final lockup expires on December 14.

So please stay away from FB—there’s just too much working against it in an already uncertain environment. If you really itching for an internet stock or two, these three stocks are much better buys right now.

Sincerely,

Louis Navellier

Louis Navellier

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