Is Facebook an Outperform?

With shares of Facebook (NASDAQ:FB) trading at around $28.32, 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

Facebook is one of the most hotly debated stocks. This makes sense considering it’s a company with a lot of potential that hasn’t delivered top-notch results. Facebook has shown an annual profit over the past few years, but these profits haven’t been impressive, and EPS is now heading in the wrong direction. However, top-line growth has been superb. Therefore, it may depend on your investing style. If you like fast growth in tech, then Facebook might be for you. If you’re more like Warren Buffet and you want to know what you’re getting without any surprises, then Facebook isn’t for you. That said, let’s look at the first part of this equation for a moment before moving on. Is Facebook really a fast growth tech stock? If you’re looking at annual revenue growth, then the answer is yes. But if you look at stock performance, then you can find many better options. Plus, many of those better options don’t have a trailing P/E of 1888. Yes, that’s four digits. The forward P/E is 35.85, which is still high. Margins are average at best, and cash flow is solid. The balance sheet is also strong, but it might not remain as strong as it has been in the past. If Facebook can’t grow organically, then it will attempt to grow through acquisitions, which will alter the company’s financial strength. And it doesn’t look like Facebook will be capable of showing consistent EPS growth. Attempting to monetize mobile will be difficult, which has already been admitted by Facebook itself.

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If you like to take a macro view, then consider that AOL Inc. (NYSE:AOL), Yahoo! Inc. (NASDAQ:YHOO), and even Myspace (to a much lesser extent) were once on top of the world. Yahoo is the best example. While the platform was different, it was only a matter of time before the company began to slide from the top of the tech mountain. Yahoo is still a solid company, but it’s not what it used to be due to increased competition and new innovations. Though it’s difficult to see now, Facebook will face the same fate. This isn’t a company that sells products or services that people rely on. Another problem here is that since Facebook doesn’t sell products or services, it’s highly vulnerable to economic downturns. If the market corrects, investors will flee from Facebook. It’s also important to point out that the majority of retail investors who would be interested investing in Facebook have already done so.

Before we move on to an opinion on the stock, let’s have a little fun. There are some facts about Facebook that you might not know. One, the average number of Facebook friends is 130. Two, 7.6 percent of the global population has used Facebook at one time. Three, over 95 percent of people who visit Facebook will return to the site within 30 days. Four, the average number of friend requests is two per week.

Based on Alexa.com results, Facebook ranks as the second most popular site in the United States as well as in the world. Over the past three months, pageviews have increased 8.99 percent, the bounce rate has declined 5 percent (this is a good thing,) and time on site has increase 8 percent. Traffic isn’t a problem, but profit is a problem. And when it comes to investing, the savviest of them all want consistent profits.

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

E = Equity to Debt Ratio Is Strong        

The debt-to-equity ratio and balance sheet for Facebook are strong… for now.   

Debt-To-Equity

Cash

Long-Term Debt

FB

0.23

$9.63 Billion

$2.36 Billion

GOOG

0.10

$48.09 Billion

$.21 Billion

 

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T = Technicals on the Stock Chart Are Mixed

Facebook has been all over the map since its IPO. This is hardly comforting for investors. On the other hand, traders with good timing have enjoyed this rollercoaster ride immensely. Year-to-date, Facebook has underperformed Google (NASDAQ:GOOG) and the S&P 500.

1 Month

Year-To-Date

1 Year

3 Year

FB

-4.25%

6.39%

N/A

N/A

GOOG

12.54%

12.09%

31.13%

45.96%

S&P 500

2.83%

6.86%

14.19%

47.31%

 

At $28.32, Facebook is trading below its 50-day SMA, and above its 100-day and 200-day SMA.    

50-Day SMA

28.76

100-Day SMA

25.33

200-Day SMA

23.87

 

E = Earnings Have Been Unimpressive               

This story really boils down to earnings. If Facebook could show consistent EPS growth, then all doubters would be proven wrong, but at this point in time, that seems to be highly unlikely. Of course, top-line growth has been superb.

2008

2009

2010

2011

2012

Revenue ($)in billions

272.00M

777.00M

1.97

3.71

5.09

Diluted EPS ($)

-0.06

0.10

0.28

0.46

0.01

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue, but a decline in earnings. This should come as no surprise.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in billions

1.13

1.06

1.18

1.26

1.59

Diluted EPS ($)

0.14

0.09

-0.08

-0.02

0.02

 

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 Do Not Support the Industry

Trends don’t support the industry because monetizing a social network has proven to be extremely challenging. At least that’s the case when it comes to the bottom line (a common theme here.) Mobile is growing at a rapid pace. If Facebook could find a way to monetize in the mobile market, then we would see a big winner.

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Conclusion

Facebook is a great website, but it’s not a great stock. Plus, the market is currently enjoying the virtuous cycle. However, reckless government spending often leads to the vicious cycle. You can see more on the virtuous and vicious cycles here: http://en.wikipedia.org/wiki/Virtuous_circle_and_vicious_circle.

If the market corrects (for any reason,) then investors are going to leave their Facebook positions much faster than they leave their Johnson & Johnson (NYSE:JNJ) or Exxon Mobil Corporation (NYSE:XOM) positions.

Those looking for a quick trade might find a winner with Facebook. It’s even possible the stock will run much higher over the next few years. But it’s not a high-quality long-term investment. For now, Facebook is a WAIT AND SEE, but it’s a long-term STAY AWAY.

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