What Do These Factors Say About Facebook?

With shares of Facebook (NASDAQ:FB) trading around $27, 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 operates as a social networking company worldwide that 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 with the company. It offers advertisers a combination of reach, relevance, social context and engagement. As Facebook increases its worldwide user base, look for the company to continue engaging its audience and increasing its revenue.

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T = Technicals on the Stock Chart are Mixed

As seen in the Facebook’s price chart, its stock has been difficult to value and has seen swings of positive and negative movement. The stock established lows last year near $17 per share and subsequently trading higher as it seeks to find a consensus price. 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

46.12%

90%

84%

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

Put IV Skew

Call IV Skew

May Options

Steep

Average

June 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 very 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 Increasing 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-85.71%

-120%

-172.73%

-18.18%

Revenue Growth (Y-O-Y)

40.14%

32.29%

32.29%

44.73%

Earnings Reaction

-0.83%

19.12%

-11.69%

N/A

Facebook has seen increasing revenue growth but is still working on its earnings growth. From these figures, the markets have been very emotional about Facebook’s latest earnings announcements.

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P = Poor Relative Performance Versus Peers and Sector

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

Facebook

Zynga

Google

Microsoft

Sector

Year-to-Date Return

-2.64%

44.77%

8.58%

4.27%

6.29%

Facebook has been a relative underperformer year-to-date.

Conclusion

Facebook is well-recognized brand and platform that can provide connections between millions of users around the world, entertainment hubs, and businesses. The company participates in a new industry that is still difficult to value so investors seem to be pushing that stock in a wide range on mixed earnings and revenue reports. This had led Facebook stock to trail in year-to-date performance relative to its peers and sector. WAIT AND SEE what Facebook does in the coming quarter.

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