Dec 2, 2012 · 4 minutes

The stock market is a fickle beast. Although it's been shown time and again to be a questionable measure of a company's worth, there's still this idea out there that a company is only as good as its stock price performance. Look at Facebook. In the past six months or so, it's gone from a new tech giant with a twelve-figure valuation to one of the worst IPOs in memory.

And now, Facebook is facing a kind of redemption. It's not an expensive joke anymore, it's a company that has a bright future again. Or that's how things seem if you look at its stock price. In the past three weeks, Facebook shares have risen from a low point of $19 to $28, a rise of 46 percent. Moreover, the rally has been a steady one, gaining for 11 of the last 12 trading days.

But the reality is, Facebook the company hasn't changed as much as Facebook the stock. When Facebook's share price was trading below $20, the company was very much the same one as it is today, with its valuation up by about $24 billion. At one point or the other, investors were wrong about Facebook's true value.

So which is it: Was Facebook too cheap before, or is it getting too expensive today? Probably a little of both. The market may be getting a little too bullish after compensating for having been a little to bearish before.

One of main reasons Facebook's shares slumped for its first six months had little to do with the outlook for its business operations. Hundreds of millions of shares have become available for trading over the past several months, including 804 million on November 14. The prospect of insiders selling even a small portion of their shares had kept many potential buyers at bay.

As we know now, that didn't happen. It only occasionally does when a post-IPO lockup expires, unless things are so bad at a company the wheels are coming off. But it weighed on Facebook, because shareholders loathe uncertainty. Short-sellers took advantage of this uncertainty by selling Facebook shares ahead of the lockup. When it finally came with no insider selling, they closed their short positions, adding to the stock's bounce.

But what about Facebook's fundamental health? The lockup expiry passed just as Facebook was showing that it's serious about finding new areas of growth. The change in tone among research analysts from concern to enthusiasm reflects the shift in investors sentiment. Where mobile-ad revenue was a concern, now Facebook has “cracked the mobile code,” argued Topeka Capital analyst Victor Anthony.

Not everyone was so optimistic, but some bearish holdouts have changed their tune. Last week, Bernstein analyst Carlos Kirjner raised his rating on Facebook and lifted his price target to $33 a share from $23 a share. Sterne Agee's Arvind Bhatia also boosted his target to $32 a share from $26 a share. Both analysts cited improved mobile revenue as well as non-ad-revenue like Gifts.

In many ways, sentiment has recovered back to where it was around the time Facebook went public. As a blogger on SeekingAlpha noted, the consensus revenue estimate for Facebook in 2013 went from $6.48 billion in early June to $6.28 billion in late October. Now it's back to $6.44 billion. Those estimates parallel the movement in Facebook's stock, and in some ways are a direct response to it.

But this renewed enthusiasm for Facebook's prospects risks overlooking clouds still hanging over the company's future. While Facebook has made some decisive moves in recent months, how well it can execute on these plans remains to be seen. Will Gifts catch on, and if so will it be just another short-lived consumer fad like Groupon? Will search provide a new revenues in a market that Google long ago mastered? Will Google, for that matter, keep eating into the market share for display ads? And can Facebook insert more ads into the small screens of mobile devices without alienating users? Or will it soon hit the saturation point on mobile ads?

Another big issue is that the specter of insider selling still hasn't gone away. Some 1.3 billion shares have become available for trading since August, on top of the 420 million sold in the IPO. No, insiders didn't dump shares when the lockups expired, but they will still want to sell at least some of them in the future. Former employees will want to raise money to found new companies. Current employees looking to buy homes know that Bay Area housing prices are already rebounding,

The more Facebook rises in coming months, the more insiders are likely to sell. They will be joined by public investors who bought the stock on its way down and held on hoping for the long-term rebound that is happening now. And then there are the institutional investors who bought Facebook shares on secondary markets before its IPO, when auctions of the stock let them buy in when the stock between $30 a share and $42 a share. If these investors can sell at a modest profit, many will.

All of this will make it challenging for Facebook to rally above its $38-a-share offering price for some time. Shareholders are involved in kind of Prisoner's Dilemma with each other. The longer everyone holds onto their Facebook shares, the more the company's improving financials will push up the stock. But if some investors start cashing in on those gains, others will join in, not wanting to miss out.

So yes, things are clearly looking up for Facebook. But the stock remains 26 percent below its offering price. And even then, it's priced at 54 times its estimated 2012 earnings and 43 times its 2013 earnings. Bulls may look at those P/E ratios and decide the company's future prospects still make it a good buy. But they should remember there are people who own more than a billion shares of Facebook who also have good reason to sell when they think the price is right.

[Photo courtesy of Beyond the Lens on Flickr.]