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FB Stock Gets an Upgrade – Should You Buy Facebook?

Facebook (FB) just got a big upgrade from SunTrust social media analyst Bob Peck, with a new price target of $65. That’s about 18% upside from current pricing on FB stock.

facebook-earnings-fb-stockThe five reasons Peck cited for its Facebook stock upgrade are as follows:

“Our more bullish outlook is driven by 5 factors:
1) Ad load concerns seem to be overdone and are being offset by better targeting & pricing;
2) Teen usage concerns are over blown, as Facebook has crossed the chasm from “cool app” to a utility;
3) Social apps, and Facebook particularly, seemed to have a strong 4Q based on 3rd party reports;
4) The monetization of Instagram has begun, helping counter a tough comp;
5) Mobile video ads have begun, also helping a tough comp. We think Instagram and video ads can add ~$300m in new revenues in 2014.”

Those five reasons are certainly something to think about. But obviously it’s still a leap of faith to invest in FB stock, since the first two reasons are all about bears being wrong and the last two reasons are all about living up to the big expectations of the bulls.

And with Facebook shares now sporting a forward price-to-earnings ratio of about 50 after a 100% run-up for FB stock in 2013, one could argue that even if the best happens, it might not be enough to fuel further upside after success being priced in during the past several months.

However, there is no stock better positioned to capitalize on the growth of social media advertising than Facebook. Its core property remains dominant and the $1 billion purchase of Instagram could wind up producing big gains in both the short- and long-term to compliment the legacy FB advertising model.

I agree that the negativity is a bit overblown regarding troublesome ad targeting and the lack of the “cool factor” with teens.

Still, I question just how well FB will be able to monetize Instagram out of the gate. Mobile screens are smaller, meaning less ad inventory. Also, the image-heavy format of Instagram doesn’t lend itself to a lot of options beyond sponsored posts — a format that could be very annoying if stuffed frequently into users’ Instagram streams.

Furthermore, Facebook remains at or near critical mass in key western markets, and it is heavily reliant on increased revenue per user to lead to increased profitability going forward. This is a serious question for Facebook stock as the company starts to stare down the problem of making incredibly large profits and sales even larger… and at a brisk enough pace that satisfies the FB stock bulls.

Me, I’m waiting for Facebook’s January earnings results to set up the story for 2014. If in fact FB continues to grow its users abroad quickly and increase its revenue per user at home, then I think the foundation is solid for continued upside in the next year and beyond.

But if Facebook suffers its first ever quarter-over-quarter user decline and fails to monetize users at a significantly better pace, then the migration to mobile and the rollout of Instagram could simply be ways to maintain the business going forward instead of grow it.

It’s hard to bet against Facebook stock long-term, so I’m not saying to short FB. But if you’re not already long, I would wait for earnings to verify (or refute) this SunTrust outlook before you jump in.

The froth in social media is pretty apparent after red-hot runs for LinkedIn (LNKD) and Yelp (YELP) last year. And after Twitter (TWTR) has started to crumble, one has to wonder whether the rest of these stocks are next.

So tread lightly in FB stock, even amid this big upgrade news.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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