Is Facebook a Bargain Here?

With shares of Facebook (NASDAQ:FB) trading at around $27.16, is FB an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Since Facebook Home is the biggest recent news related to the Facebook story, let’s get that news out of the way first. For those who aren’t familiar with Facebook Home, this is its description on Google (NASDAQ:GOOG) Play: “Facebook Home puts your friends at the heart of your phone. Replace your standard home screen with a steady stream of friends’ posts and photos. Get to apps with one swipe — just drag your profile picture up to open the app launcher. And when you download Facebook Messenger, you can keep chatting with friends when you’re using other apps.”

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Facebook Home currently has a rating of 2.2 of 5 on Google Play, which is poor. Here’s a breakdown of those ratings:

5 Stars: 3,060

4 Stars: 1,221

3 Stars: 1,575

2 Stars: 2,187

1 Star: 8,956

It’s definitely not a good sign that almost 9,000 people have given Facebook Home the lowest rating possible. All that said, Facebook Home isn’t going to make or break the company. It’s simply a miss (so far). This is okay, and it even fits with the company philosophy.

Mark Zuckerberg has created an atmosphere where ideas should be shared, and risks should be taken. He doesn’t want his employees to fear failure. If someone has an idea, it gets to the top for review within one week. This, in addition to the work/play environment, has led to a strong company culture. This doesn’t mean employees play half the day. It means that breaks are allowed at the employee’s convenience as long as that employee is productive. Has this approach worked?

Facebook is rated as the #1 place to work by Glassdoor.com. Yes, it has worked. Employees have rated their employer a 4.6 of 5. An incredible 95 percent of employees would recommend the company to a friend. And 98 percent of employees approve of CEO Mark Zuckerberg.

A strong company culture definitely improves the odds of a company’s success, but it doesn’t guarantee success. This has been evidenced by Facebook Home. Facebook also has other challenges at the moment, which include increased expenses mostly due to infrastructure expense and increased headcount.

Facebook intends to increase spending by as much as 50 percent in 2013. When a company wants to revolutionize online advertising, there is going to be a great deal of risk-taking. While many people don’t like Mark Zuckerberg, his innovation, risk-taking, and ability to create a strong company culture must be admired, or at least respected.

As far as results go, revenues have been on the rise for the most part. It’s the bottom line that needs to strengthen. In regards to users, results have been strong. On a year-over-year basis in Q1, there was a 26 percent increase in daily active users, a 23 percent increase in monthly active users, and a 54 percent increase in mobile monthly active users. However, according to Alexa.com, traffic hasn’t been great over the past three months. Over that time frame, pageviews-per-user have declined 3.46 percent and time-on-site has declined 2 percent. At least the bounce rate has declined 2 percent. And it should be noted that Facebook’s traffic stats are ridiculous (that’s meant in a good way). The pageviews-per-user average is 17.56, the time-on-site average is 27:45, and the bounce rate is 20.40 percent. Those numbers are lightyears ahead of the average website.

This article might sound positive so far, but let’s keep in mind that margins are razor thin, and that the stock is trading at 591 times earnings. Therefore, if any company-specific or broader-market devastating news should come out, the stock is going to get slammed.

The chart below compares fundamentals for Facebook, Google Inc. (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT).

FB GOOG MSFT
Trailing P/E 589.67 26.55 17.19
Forward P/E 35.23 16.69 10.85
Profit Margin 1.22% 20.92% 21.58%
ROE 0.77% 16.36% 22.58%
Operating Cash Flow 1.89B 16.56B 30.61B
Dividend Yield N/A N/A 2.80%
Short Position 1.70% 1.50% 1.30%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Mixed

Facebook hasn’t done much year-to-date. This is better than a loss, but it has greatly unperformed its peers as well as the market.

1 Month Year-To-Date 1 Year 3 Year
FB -1.26% 1.64% N/A N/A
GOOG 12.11% 25.21% 46.34% 73.37%
MSFT 15.40% 25.42% 9.83% 22.88%

At $27.16, Facebook is trading above its averages.

50-Day SMA 26.69
200-Day SMA 26.91
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E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Facebook is slightly weaker than the industry average of 0.10. However, debt isn’t a concern at the moment. It could be a concern if Facebook were to make a large acquisition, but a large acquisition would also have the potential to lead to improved growth. It would be a tough call in this economic environment.

Debt-To-Equity Cash Long-Term Debt
FB 0.19 9.47B 2.26B
GOOG 0.10 50.10B 7.38B
MSFT 0.19 73.79B 14.76B

E = Earnings Are Decent

We don’t have much information on annual earnings yet. Stay tuned. Annual revenue growth has been impressive.

Fiscal Year 2010 2011 2012
Revenue ($) in billions 1.97 3.71 5.09
Diluted EPS ($) 0.46 0.01

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and flat earnings.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in billions 1.06 1.18 1.26 1.59 1.46
Diluted EPS ($) 0.09 -0.08 -0.02 0.0143 0.09

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

There are many new websites gaining momentum and stealing traffic from the old guard. Yes, Facebook now qualifies as the old guard. For instance, Twitter has stolen a great deal of traffic from Facebook. This has a lot to do with the younger generation not thinking Facebook is cool. Remember, the kids who were obsessed with Facebook several years ago are now older. The kids who are now teenagers want something of their own to embrace – they want something new. Perhaps Facebook won’t target that market, but that would limit growth potential. It basically comes down to this: Is Facebook cool? What’s your opinion? What are your kids’ opinions? The answers to these questions might be the most important information available.

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Conclusion

At the moment, Facebook is a tradable stock. This column often focuses on solid and proven companies. Facebook is different. It’s a proven website, but it’s not a proven company. It has also traded between $20 and $30 for a long time. Bulls haven’t had a strong enough argument for a sustainable move above $30, and bears haven’t had a strong enough argument for a sustainable move below $20. This pattern is likely to continue. Facebook will have to be very creative to be able to find new revenue streams and fight off old and new competition. Perhaps the most dangerous competitor hasn’t even arrived yet.

All factors considered, Facebook is a WAIT AND SEE.

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All content posted should never be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.