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Lessons Learned From the Facebook IPO

June 20, 2012

Stock of the Day

It has been just over a month since Facebook.com Inc. (FB) went public, and I think it's safe to say that we have all learned a lot from this IPO. For one, between the NASDAQ improperly executing trades for 30 million shares and lawsuits tied to the company's reduced sales guidance, small-time investors were hit pretty hard by this IPO. Now that the stock has had 24 trading days under its belt, let's revisit this company and see whether its prospects have improved or if we should continue to table this stock.

One thing is for sure: Facebook.com Inc. has been keeping busy in the past month.

Just yesterday, the company purchased facial recognition Face.com for as much as $60 million. While Facebook already used Face.com's technology on its desktop sight, the acquisition will allow users to auto-tag friends in photos on its mobile site. Analysts also expect that the facial recognition software could be integrated with Facebook's newly acquired Instagram photo sharing site.

Earlier in June, the company revamped its apps layout to be more mobile friendly. The "App Center" includes more than 600 apps and is designed to increase the number of daily active mobile users. Rumors have also surfaced that Facebook has hired a team of ex-Apple engineers to try to launch its own smartphone by next year. 

The mobile shift is a big deal to facebook because it is reducing the time people log onto facebook via their traditional computers. Thanks to the Facebook app, over a third of users spend less time on the website than six months ago. This is affecting the effectiveness of advertising on the website, which is Facebook's primary source of revenue.

And the company is still dealing with ongoing lawsuits related to the IPO; Facebook.com Inc. is currently working to consolidate some 40 investor lawsuits. The company is largely blaming Nasdaq for the glitches and in response the exchange has established a $40 million fund to compensate traders.

I won't add FB to my PortfolioGrader tool for another 11 months; we can get a better sense of earnings and sales trends once the company has released four quarters' worth of earnings announcements. In any event, I'm not convinced that the stock would receive a solid grade. To start, buying pressure for FB has been flagging ever since the company went public. Also, the company has lowered its sales guidance for the second quarter, an issue that ended up hitting shares of FB pretty hard.

So one month later I must reiterate my earlier recommendation: Leave this stock be for now. The company is working double-time to entice users and advertisers alike, but its too soon to tell whether these initiatives will have a real impact on sale sand earnings.

Sincerely,

Louis Navellier

Louis Navellier

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