Mar 14, 2014 · 6 minutes

It's a little hard to believe now, but here is what Wall Street was saying about Facebook only a year ago: Mobile revenue was sluggish, user user engagement was declining, targeted ads weren't winning over advertisers. Back then, the stock was still trading below its $38 a share offering price, and few analysts saw the stock rising very far above it.

Today, it's a very different story. Facebook is trading near $70 a share, mobile makes up more than half its total revenue, and advertisers are not only flocking to Facebook's mobile news feeds but to Instagram as well. Now price targets are rising as high as $90 a share. That price would give Facebook a market cap of $230 billion.

I don't mean to pick on analysts, since shifts in the Internet industry can be as sudden as they are unpredictable and few outside of Wall Street foresaw such a dramatic reversal of fortune. My point is that sentiment has shifted from that skepticism to a bullishness that seems just as unwarranted, and may, in retrospect, appear just as misguided.

There is no question that Facebook has a lot going for it now. The company has built a vast mobile user base and brought ad dollars into their feeds without alienating most of them. It's learned from its past mistakes and is determined to have an answer to problems before they arrive. It's on the upswing and will take bold steps to remain on an upswing, as the WhatApp deal demonstrated in dramatic fashion.

So if it seems premature to suggest that Facebook's comeback is beginning to slow down, it's not too early to wonder whether investors and analysts aren't getting ahead of themselves in blind optimism, the way many of us got carried away with Facebook pessimism less than 12 months ago.

Facebook is trading today at 57 times its estimated 2014 earnings. In hindsight, a PE that high would have made more sense a year ago, before Facebook's revenue growth rate went from 38 percent (a year ago) to 63 percent (a quarter ago). But now it looks like that growth rate will slow again to 44 percent this year and 32 percent next year. Net income is forecast to see a similar slowdown.

It's hard to knock a big company growing revenue and profit in the 30-percent range. Facebook's forecast growth is similar to that of LinkedIn. The issue with Facebook's stock is that the stock is priced to see much faster growth. As some observers have pointed out, Facebook would have to keep profits growing by 30-percent a year for five years -- no sure thing -- to bring its PE ratio in line with the market average.

You don't have to be bearish on Facebook to see that a lot could go wrong with the company in the next five years. The consumer-web industry that the company is active in an area that has seen several sudden, often unpredictable shifts. Facebook has been at the forefront of two: the rise of social networks, and the rise of mobile advertising. They have made for two very happy acts, but there's no guarantee that Act Three will go as smoothly.

Google's history provides a historical antecedent. The company went public in 2004 at $85 a share and by November 2007 had tipped above $700 a share. Analysts were raising price targets as high as $985 a share. Then the stock entered a five-year period of stagnation, vacillating around or below the $500 level. Only in 2012, after CEO Larry Page began to steer the company in a bolder direction, did the stock finally push to higher levels.

Now consider a typical Facebook research report like this one from Stifel Nicolaus last month, when the firm raised its price target to $82 a share from $72. Analyst Jordan Rohan said that Facebook's emergence as a communications platform for marketers was a big reason why.

Marketers view Facebook as a strategic communications platform, capable of establishing and reinforcing relationships with consumers. Facebook helps with direct response marketing, branding, public relations, and customer relationship management (CRM). Having proven the efficacy of its ads in 2013, Facebook now stands to receive a significantly higher proportion of clients’ marketing budgets, particularly from sophisticated marketers who have committed resources to track the efficacy of FB spend.
This sounds a lot like the promise surrounding another once-hot Internet stock: Yahoo in the pre-social network era of Web 1.0. Back then, Yahoo had seen its stock surge too – it rose from $5 a share in 2002 to $43 a share in late 2005 – because of what analysts called its “global platform” for advertisers. It too offered not just ads but branding. Yahoo had outlasted other early Web giants like Excite and Lycos. It was where big advertisers turned for online spending and was poised to be the 21st Century's first media giant.

Then the market turned away from Yahoo. Search and eventually social media left its empire of banner ads fraying. The stock is still trading below those 2005 highs. Facebook may not be destined to follow in Yahoo's footsteps, but Yahoo does offer a case study in the perils of being a 21st Century media giant in a market driven by hyperevolution.

Facebook is hardly being complacent, rolling out new apps like Paper and making acquire-at-any-cost deals like Instagram and WhatsApp. But a decade ago, Yahoo was also making aggressive acquisitions: Big-ticket deals like search-marketing company Overture Services ($1.6 billion) and price-comparison site Kelkoo ($600 million), not to mention many smaller startups with big talent, like, Flickr and MusicMatch.

Many of these acquisitions foundered inside a culture that opted for bureaucratic management over serendipitous innovation. Facebook's longtime adherance to the hacker way may preserve it from a poisonous culture, but the company is struggling with rapid growth as it transitions from a social-networking web site people flocked to into something that connects as many people as it can, however it can connect them.

Facebook's purchase of WhatsApp resembles Google's $12.5 billion purchase of Motorola Mobility in a few ways. If the target companies were very different, the motives of the buyer were similar. Both were eleven-figure deals with an air of desperation. Both were at heart defensive moves (Google needed patents, Facebook needed Google not to buy WhatsApp.) And both appeard to be impulse buys - that is, the CEOs simply trusted the moves would pay off, even if nobody could explain why.

No one can say with certainty that WhatsApp will pay off for Facebook. The plain truth is it could be a brilliant move or a colossal misstep. But the stock market doesn't like uncertainty, which is why we hear over and over that the deal makes “strategic sense” despite the $19 billion price tag. And that is exactly the kind of vague and tortuous rationale that Wall Street offers when nobody dares to argue against a bullish trend.

Parsing sense from the deal is difficult when there are more questions than answers: Can WhatsApp fend off competitors? Will messaging apps be the multi-featured platforms they dream of becoming, or will a better idea displace them in a couple of years? Can WhatsApp charge users without driving them to cheaper apps? Can Facebook monetize WhatsApp without, as promised, changing its anti-ad and pro-privacy ethic?

Facebook may be as financially and operationally sound as it's ever been right now, and yet there is emerging a disconnect between the price that investors are willing to pay for the stock and the growing void of uncertainty that faces the company's continued growth in coming years. We saw a similar disconnect a year ago when the bears were blindly pessimistic. This time, it's the bulls who may be caught off guard.

[illustration by Brad Jonas for Pando]