by Kevin Kelleher, contributor
FORTUNE – A year ago, few investors were bullish on Facebook (fb). Some writers argued that, at $23 a share, it was still overvalued. Others thought Yahoo (yhoo) under Marissa Mayer had a better shot at a turnaround. While some bears were beginning to temper their pessimism, the consensus view was that Facebook was expensive and speculative.
In the past year, Facebook's stock has risen 115%, against a 37% rise in the Nasdaq Composite Index. Of 40 securities analysts tracked by Thomson/First Call, 32 currently have a buy or strong buy rating, 8 have a hold rating and none have a sell rating. Even with the rally, short interest on the stock is a third of what it was a year ago.
What changed? The main reason for this reversal of fortune in Facebook's stock is the company's sudden growth in mobile ads. Back when the stock was languishing in the $20 range, Facebook vowed to monetize its audience's shift from desktop computers to mobile devices. That focus on mobile worked. A year ago, revenue was growing at only 32%. In its most recent quarter September, revenue grew 60%.
In the last few weeks, however, there have been a few signs that Facebook's impressive rally is running out of steam. Last week, the stock traded as low as $45.73, or 17% down from its record high of $54.82 one month ago. The stock was trading around $47 a share Monday. Is this decline an early sign of a downturn or just a quick sputter? Looking ahead, it's worth considering factors that could derail the Facebook rally.
Facebook's turnaround is priced into its stock. The company's recovery was so impressive it paradoxically set the bar of expectations higher even than it was when Facebook went public in May of last year. That has left Facebook very expensive, priced for growth that won't happen for a couple of years: Facebook is trading at 125 times its trailing 12-month earnings, and at 44 times its estimated earnings in 2014.
There are still several factors that will drive Facebook's growth: the company is better targeting its ads to deliver stronger returns for advertisers; it will start to sell more ads on Instagram and on Facebook videos; it can build a stronger third-party ad network; and advertiser demand for Facebook ads is showing no signs of slowing right now. That's a sunny forecast, but it's well known. It doesn't justify the stock moving higher from here.
Facebook will see growth rates decline again. Analysts are forecasting 50% growth in Facebook revenue for 2013 and 36% for 2014. That's with all of the growth initatives listed above. But all of this hinges on an important question with a very uncertain answer: How many more ads can Facebook load into its mobile feeds without driving away users?
In Facebook's last earnings call, CFO David Ebersman said the company “significantly” increased desktop ads but “modestly” increased those in mobile feeds. The company plans on keeping ads at around 5% of mobile-feed content, relying on growing usage and rising demand to maintain growth.
Since Facebook users are accessing the site on mobile devices, this could limit future growth. Facebook's mobile revenue growth in the past year has been strong partly because, a year ago, this revenue stream was so new and insiginificant. In coming years, the comparison's won't be so dramatic. In short, after a surprisingly strong year, Facebook's growth rates may plateau again.
Facebook may have problems buying new growth. When a big company's organic growth stalls, it's common to buy fast-growing companies. Mark Zuckerberg knows this, which is why his company bought Instagram when it was looking to become a leader in mobile picture sharing. In retrospect, that deal worked out much better for Facebook than for Instagram.
Last week, Snapchat spurned an even more generous offer from Facebook. The episode underscored how today's hot startups don't dream of being bought by Facebook, they long to supplant Facebook, which means remaining independent. Snapchat's founders were reportedly averse to working for Zuckerberg, while its VC backers weren't interested in the deal either.
There are thousands of startups that would love to be bought by Facebook at a rich price. But the Snapchats among them – the rare beast that resonates mysteriously with an ever-growing audience – aren't among them. To them, Mark Zuckerberg is The Man. And if you're really good, you don't sell out to The Man at any price.
Facebook continues to have a teenager problem. In the recent earnings call, Ebersman tried to put a positive spin on this. Although the company is “close to fully penetrated among teens,” he said “we did see a decrease in daily users specifically among younger teens.” The comments backfired, drawing new attention to the issue.
On the one hand, advertisers are more interested in older demographics that spend more money. On the other, this could be a long-term issue if teens grow older and don't migrate to Facebook's platform. Snapchat was supposed to help resolve this problem, but the failed deal only added to the image that Facebook is struggling to relate to a new generation of users.
One final development that is not necessarily a bearish sign but is worth considering. Last week, Ebersman sold $43 million worth of his shares, or 9% of his Facebook holdings, at around $47 a share. While the sale was part of a pre-arranged trading plan, it's also the largest stock sale by a CFO in the last decade.
Such pre-arranged trading plans were set up to allow sales without creating the appearance of insider dumping, which I doubt was Ebersman's intention. Still, there is something to be said about the timing. Arguably, no one has a better perspective on Facebook's financial outlook. It's not insider trading if your gut is telling you this is a good time to sell. It may, however, be an instinct other Facebook investors may want to note.