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Will Facebook and Zynga Embarrass Analysts?

If you get uncomfortable when an inordinate number of Wall Street analysts come to a consensus and agree with your sentiment on a stock, you're not alone. You're not being paranoid, either.

I'm bullish on Facebook (FB). I am also bullish on Zynga (ZNGA). Most of Wall Street is as well.

TheStreet's James Rogers ran down the post-IPO quiet period analyst coverage on Wednesday in an article titled "Facebook: Who's Saying What?"

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The lowest price target I saw was $34 from Credit Suisse. Most came in somewhere between $38 and $45, with JPMorgan among the most positive.

My review of analysts' comments shows that they agree with me about Facebook's ability to leverage its size and create a wide-ranging ad network to challenge Google (GOOG) and monetize its growing base of mobile users.

An even more bullish consensus encapsulates analyst sentiment toward Zynga. I won't bore you with details you've likely already seen, but price targets in the teens and reiterated "buy" ratings, particularly in defense of the stock after a sell-off, are quite common. The analyst comments coincide with my bullish view on the stock.

On the surface, this might sound like a good thing. The big money agrees. What can be wrong about that? Well, we all know that you cannot necessarily trust what the big money says.

The Netflix (NFLX) experience from 2011 helps illustrate this point.

Consider what I had to say over at Seeking Alpha this past December about Goldman Sachs analyst Ingrid Chung's coverage of Netflix:

... has anybody heard from Ingrid Chung at Goldman Sachs? ... After Netflix's disastrous Q2 and weak Q3 guidance in July, Chung waxed bullishly, not only reiterating a buy rating and her $330 price target, but raising EPS estimates from 2011 through 2013.

Before you read this next sentence, call some family, friends or co-workers over to your computer screen, because there's nothing like sharing a laugh with others around the holidays. For 2012, Chung predicted Netflix would post EPS of $7.69.

While things seem to be a wee bit more optimistic, Netflix, according to its first-quarter letter to shareholders, expects to come in around break-even and possibly even post a loss. That's going to make $7.69 for the year next to impossible.

To be fair, Chung had plenty of company in being wrong. That said, I am not sure I have ever seen a worse performance than hers.

Luckily, throughout 2011, I was adamantly on the opposite side of the trade. But now, with regard to Facebook and Zynga, I find myself in agreement with the same crew of folks who touted Netflix. That leaves me slightly concerned.

Although this pause will not necessarily make me change my position, it does provide something investors should look for more often: a reason to re-evaluate their stance.

This is Not Bubble 2.0

If you listen to bearish sentiment -- whether its toward Facebook, Zynga, or some other company that straddles the tech/Internet/new and social media spaces -- you quickly realize that it's based on one thing happening and another thing not happening.

The thing the bears like to call "Bubble 2.0" must pop. And companies such as Facebook, Zynga, and Pandora (P) will have to fail in their attempts to monetize mobile users. In fact, they'll have to, for one of the first times in history, live through and, presumably, die during a time when advertisers stubbornly refuse to go where their customers are.

By a similar token, companies that have changed one game or another -- particularly (AMZN) -- will watch their massive customer bases revert back to old ways and/or flock to something new that doesn't even exist yet.

That's not a straw man. It's pretty much what the bears expect and need to happen for Facebook, Zynga, and Pandora to fail and to implode. I'm not willing to go that far.

I am willing, however, to entertain the idea that Twitter or Rovio or Spotify bolt ahead of Facebook, Zynga, or Pandora. I don't necessarily think that will happen (I fall on the side of co-existence and/or consolidation), but it's more likely than the abrupt end to the exciting era we're living through now. Think about that. That's what bears need: They need this bubble they have dreamed up to pop and the mobile advertising and e-commerce sectors to fall off a cliff.

They point to the dot-com boom and bust of 1999-2000. Although it produced some casualties, you would be hard-pressed to argue that all did not end well. came out of that period and revolutionized retailing. The era spawned quite a few game changers as well. Things turned out nicely for Google and (CRM). You can even argue that the events of the turn of the century contributed to Apple's (AAPL) dominance.

Bottom line: Progress is messy. That can make it scary. It does not trend a straight line; rather, it works its way through relatively unattractive fits and starts.

1999-2000 was an incredibly exciting and transformative time. I lived in San Francisco back then. I worked closely with several Silicon Valley startups. Plenty of people did really, really well. But, more importantly, the efforts of 1999-2000 made what we have seen over the last five to seven years possible. It set the stage for the next leg of innovation.

Bears like to say that "investors didn't learn anything from 2000." Bull! Why then have they punished recent IPOs? This is nothing like 2000. Not even close. That, in and of itself, should tell you that we did indeed learn a lesson.

But, again, pick your head up. It wasn't all bad. Just as 1999-2000 led to the innovation of the 21st century's initial decade, that forward momentum made what we're seeing today possible. 2008 should go down as little more than an obstacle.

By a similar token, any weakness we see now in stocks like Facebook, Zynga, and Pandora does not necessarily foreshadow tough times ahead or an impossible future. We're simply gearing up for the inevitable next leg of progress.

At this point, I'll chalk up the Netflix miss as a mulligan for analysts. By and large, they've been bullish on the broad entrepreneurial space. In many instances, it has already been the right call. In several others, we're about to see a repeat of what has actually been an incredibly positive, life-altering last 15 years in tech.

Positions in FB, P, ZNGA
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