Will Facebook Seek Higher Prices?

With shares of Facebook (NASDAQ:FB) trading around $26, 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. The company does several things: it builds tools that enable users to connect, share, discover, and communicate with each other; enables developers to build social applications on or integrate with Facebook; and offers products that enable advertisers and marketers to engage with users. As Facebook increases its worldwide user base, look for the company to continue building new revenue streams that engage its audience.

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Head on over to the next page to explore the technical landscape of Facebook’s stock…

T = Technicals on the Stock Chart are Weak

Since its initial public offering last year, Facebook stock has seen a decline in valuation that has kept its price in a downtrend. Currently, the stock is seeing lower highs and lower lows which tells us that the stock price has yet to stabilize. 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 below most of its key averages which signal neutral to bearish price action.

FB

(Source: Thinkorswim)

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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

35.15

46%

40%

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

Put IV Skew

Call IV Skew

April Options

Steep

Average

May 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 good 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 Improving 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)

-600%

-600%

-238%

-22%

Revenue Growth (Y-O-Y)

44%

42%

38%

56%

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 street has been very emotional about Facebook’s last four 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

-6.89%

39.75%

11.24%

2.55%

5%

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

Conclusion

Facebook is an established company in a new arena that is working to find its fit. The stock has not done too well as earnings and revenue growth rates have sent mixed vibes to investors. Relative to its peers and sector, Facebook is trailing by a significantly wide margin. WAIT AND SEE what Facebook does in coming quarters.

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