Will Facebook Outperform with Graph Search in Tow?

With shares of Facebook, Inc. (NASDAQ:FB) trading around $29.66, is FB an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalysts for the Stock’s MovementFacebook Graph Search

Facebook’s latest conversation starter is Graph Search. The team over at the world’s largest social network finally made good on months of speculation and unveiled a beta version of social search on January 15. The premise is pretty simple. Facebook has tons of data, and Graph Search is a unique way to filter that data in order to find answer to particular questions.

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A quick example: If you wanted to take someone out on a date but were unsure what restaurant to go to, you could search “Restaurants liked by friends of My Date,” and the service would pull up exactly what you’d expect. Granted, this list is only as powerful as the good taste of those friends, and how public their information is. Users will not be able to see any content through search that is not already shared with them or public.

The service is backed by Microsoft’s (NASDAQ:MSFT) Bing, which will be used in the event a search turns up no social results. On one hand, this is Facebook initiating a turf war with Google (NASDAQ:GOOG), and the battle map here is pretty straight forward. Observers and speculators have been fleshing out what this fight would look like for a long time, and investors have no need to panic. At its most successful, Facebook would take years to dethrone Google as search leader. What’s more realistic is a gradual re-balancing of the market as Graph Search evolves, Google reacts to it, and consumers decide which one they like.

Heading into the Graph Search announcement, Facebook’s stock broke $30 for the first time since July, its highest level since the infamous IPO. Of course, there was a lot of overly-optimistic speculation priced in come the morning of the big announcement, and the reality of a non-monetized beta search product had some investors pulling back. But Graph Search does look like a strong, long-term strategy. As it rolls out from beta and slowly monetizes, look for this service to drive revenue and, ultimately, help move the stock.

Google ended the week on a lower note as well, but a clear loser from the announcement was Yelp (NYSE:YELP). Many observers noted that Graph Search is essentially a recommendation engine, and poses a huge competitive threat to Yelp’s online review ecosystem.

Facebook, Inc. Stock Chart - FB Interactive Chart - Yahoo! Finance

T = Technicals on the Stock Chart

As of January 20, Facebook’s stock price was 3.94 percent above its 20-day simple moving average, or SMA; 12.58 percent above its 50-day SMA; and 18.44 percent above its 200-day SMA.

Since the beginning of 2013 the stock price has been in a fairly pronounced upward trend, rising 11.42 percent this year to date, but is down 22.4 percent since its IPO less than a year ago.

As a benchmark, the S&P 500 has risen 4.19 percent year to date, and has risen 12.97 percent year over year. Facebook has also underperformed the NASDAQ (in orange), but has been in rally mode since November. The botched IPO generated a lot of bad mojo, but most analysts have maintained long-term bullish positions on the stock.

T = Trends Support the Industry in which the Company OperatesFacebook Question

To many investors, Facebook still feels like a huge, risky bet. Other Internet IPOs like Groupon (NASDAQ:GRPN) have failed spectacularly, and seem to be fighting for their lives. Social-game developer Zynga (NASDAQ:ZNGA), which for a long time was tied in very closely with Facebook, is also a disaster story. The relationship between these companies makes Facebook look both good and bad by comparison. Good, because it has displayed relative strength while other Internet IPOs have displayed weakness. Bad, because Facebook has assumed some of the bad mojo that these companies generated among investors.

Monetization is at the heart of Facebook’s long-term success, and the company’s success or failure on this front has driven the stock each way. Recently, it’s been up. The company’s top and bottom lines have grown for the past four years. Mobile remains a relative gray area, but the company is pursuing innovative solutions. It hasn’t cracked the code yet, but neither has anybody else, and Facebook is at the head of the race.


Facebook’s trailing P/E of 153 makes it pretty expensive compared to its competitors in Silicon Valley, but there’s arguably a tremendous amount of growth potential to support the valuation. Shares are still below their IPO price and earnings are just $0.19 per share for the trailing twelve-month period.

Analysts are generally bullish on this stock, and maintain an average price target around $33.30. The thinking is that as long as Facebook maintains the the world’s largest, active online community, it has nothing to worry about. Facebook’s user base is a gold mine, and as long as they can hold on to them the company can figure out ways to monetize.

Because of this, and the metrics mentioned above, Facebook is a long-term OUTPERFORM.

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