Is Facebook A Buy?

With shares of Facebook (NYSE:FB) trading around $24, 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:

T = Trends for a Stock’s Movement

Facebook is engaged in building products to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about. Developers can use the Facebook Platform to build applications and websites that integrate with Facebook to reach its global network of users and to build personalized and social products. Advertisers can engage with more than 900 million monthly active users on Facebook or subsets of its users based on information they have chosen to share. Social networking has been a powerful movement and tool in recent years that has changed the way many companies and consumers operate. Facebook is a pioneer and a leader in the social network trend that looks to be here to stay. Facebook will see rising profits through its engagement with the increasing user base that social networking is seeing in coming years.

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T = Technicals on the Stock Chart are Mixed

Facebook stock has struggled to find a stable price valuation since its initial public offering last year. The stock saw a glorious run towards the second half of last year and into the beginning of this year, however, it has trailed lower since then. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Facebook is trading around its key averages which signal neutral price action in the near-term.

FB

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Facebook options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Facebook Options

33.8%

46%

47%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Steep

Average

July Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Facebook’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Facebook look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

0%

-89.46%

-120%

-172.73%

Revenue Growth (Y-O-Y)

37.81%

40.14%

32.29%

32.29%

Earnings Reaction

5.61%

-0.83%

19.12%

-11.69%

Facebook has seen decreasing earnings and increasing revenue figures over the last four quarters. From these figures, the markets have had mixed feelings with Facebook’s recent earnings announcements.

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P = Poor Relative Performance Versus Peers and Sector

How has Facebook stock done relative to its peers, Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), LinkedIn (NASDAQ:LNKD), and sector?

Facebook

Google

Microsoft

LinkedIn

Sector

Year-to-Date Return

-5.63%

24.94%

27.82%

53.54%

22.51%

Facebook has been a relative performance lagger, year-to-date.

Conclusion

Facebook provides a social networking experience that may be very valuable to consumers and companies well into the future. The stock has struggled since its initial public offering last year and seems to currently be searching for a consensus value range. Over the last four quarters, earnings have decreased while revenues have increased which has produced mixed feelings among investors. Relative to its peers and sector, Facebook has trailed in year-to-date performance by a wide margin. WAIT AND SEE what Facebook does in coming quarters.

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