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With shares of Facebook most recently traded at $21.94, is the stock (NASDAQ:FB) a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
The social networking giant released its long-awaited third-quarter earnings report Tuesday and grabbed investors’ attention with higher-than-expected revenue of $1.26 billion, up 32 percent from the same quarter last year. Non-GAAP earnings per share came in at 12 cents, which also edged analysts’ expectations. However, after adjustments, GAAP earnings represented a loss of 2 cents per share.
But the biggest take-home point from Tuesday’s earnings release has to be the year-over-year revenue growth of 36 percent, compared to last quarter’s mark of 28 percent. In the third quarter, Facebook was able to drive mobile traffic and ad revenue higher while not compromising user experience. As a result, advertising accounted for 86 percent of total revenue, with 14 percent of ad revenue coming from mobile.
H = High Quality Pipeline
When it comes to social networking sites that users check every single day, Facebook really remains the only game in town. Since completely re-inventing the way people stay in touch, Facebook has been successful at maintaining and cultivating its singularly unique and addictive experience through innovations like its mobile app.
Other online networking services like LinkedIn have recently revamped their offerings to try to compete – but Facebook remains the unquestioned leader in user log-on frequency, and the amount of time they spend logged in. And that superior traffic will continue to equal advertising revenue for Facebook.
T = Technicals on the Stock Chart are Still Weak
As of October 23, 2012, the stock price is 4.31 percent below its 20 Day Simple Moving Average; 3.55 percent below the 50 Day SMA; and 21.07 percent below the 200 Day SMA. Since the company’s IPO in May, Facebook’s stock price has been in downward trend and is down 41.68 percent year-to-date.
H = Honest Accounting Governs the Company Books (Unless Proven Otherwise)
Following the rapid drop in Facebook’s stock price after the IPO opened at $38 per share, the Securities and Exchange Commission (SEC) launched a probe to investigate whether Facebook had engaged in illegal selective disclosure by encouraging small, individual investors to buy, while secretly warning larger, wealthy funds to stay away.
However, as of last week the SEC had not found any indications of pre-IPO wrongdoings on Facebook’s part. The probe is ongoing, but if it does ultimately close without conclusive findings and Facebook’s record and reputation stay clean, it will be a major victory for the company, which is currently embroiled in over 40 lawsuits regarding the alleged disclosure offenses and resulting shareholder losses after the stock collapsed.
T = Trends Support the Industry in which the Company Operates
Industry trends seem to support Facebook’s prospects for the future. Like most tech companies, Facebook’s success will hinge on its ability to innovate and stay ahead of the competition. Social networking, as well as social and mobile gaming, mobile app purchases, and digital goods sales, is still a growing industry and Facebook should be able to ride the rising tide of advertisement revenues, especially in the mobile category, where room for growth seems to be greatest.
Tuesday’s earnings report will hopefully be a seed for good news to come for Facebook, which could desperately use some. The company hopes to finally get moving in the right direction after a disastrous IPO in May. Shares are still trading at nearly half the $38 value at which they were initially offered.
However, early indications suggest investors may have found reason to be optimistic in Facebook’s Q3 report. In after-hours trading Tuesday the stock jumped over 13 percent. Will this be the positive turning point Facebook shareholders have been waiting for? It might be a tad early to say that with certainty, although bold investors buying now will be willing to make that bet.
For now, it’s too difficult to simply forget Facebook’s consistent struggles since going public. We’ll call FB a WAIT AND SEE based on the key metrics above.
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