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When Facebook Inc. (NASDAQ:FB) started eight years ago, few could imagine that in less than a decade a website dedicated to helping college students connect with friends would become a household name and an over $85 billion company. Facebook’s initial public offering garnered a shocking amount of attention, partially because of the company’s popularity and partially because of the growing importance of social media. But when you cut through all the hype, is the stock worth buying?
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Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for a Stockʼs Movement — Given that the company’s initial public offering on May 18, 2012 was one of the largest and most anticipated technology offerings in history, it’s fair to say the hype surrounding the newly public company presents a huge opportunity for stock movement. With an offering price of $38, many buyers were hoping the stock would see a significant “pop” like LinkedIn Corp. (NYSE:LNKD). Instead, on opening day, the stock topped off at $42 before ending the day a few cents above $38. Now it’s trading in the low $30′s.
Now that this catalyst is gone, the focus moves to Facebook’s new products to drive monetization. Unfortunately, this is a complete unknown. The company wasn’t able to win with commerce or daily deals; and, serious questions remain about monetizing mobile. Thus, at this point, there is not a strong enough catalyst on the horizon to make a safe bet on future stock movement.
H = High Quality Product Pipeline for Future Good News — A company that has achieved so much in such a small amount of time is not likely to rest on its laurels, especially in a space as competitive as social media. To that end, Facebook is always seeking to improve its site and find creative new uses and partnerships for its product. Recently the company has been on an acquisition spree, picking up companies including: Strobe, an HTML5-based app maker that could help the company improve its mobile offerings; Karma, a mobile app that allows users to send gifts to friends and family; and Instagram, the popular photo editing and sharing software maker. Facebook also reportedly plans to launch an App Center that will allow developers to showcase new apps to Facebook’s massive user base.
Again, the unfortunate part is no clear monetization plan has surfaced. Until that happens, improving the Facebook products may be great for end users, but no necessarily investors.
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A = A-Level Management Runs the Company — Mark Zuckerberg has been his generation’s wonder boy since Facebook launched its multi-campus operation. A programmer by training, it can’t be overlooked that this innovative 28-year-old has turned a simple website into a multi-billion dollar company in less than a decade. In 2008, Zuckerberg hired Sheryl Sandberg as the company’s Chief Operating Officer. After being wooed away from Google Inc. (NASDAQ:GOOG), Sandberg has been in charge of steering Facebook into an uncharted territory for many social media companies: profitability. With Sandberg at the helm of the company’s business operations, revenues at Facebook have grown from around $150 million in 2008 to about $4 billion by the start of 2012.
This is probably the strongest variable going for Facebook. Zuckerberg is incredibly competitive and wants to win. His drive is second to none. Therefore, a bet on the jockey finding the key to monetization is not completely insane. However, it’s tough at current valuations.
T = Trends Support the Industry in which the Company Operates – In the expanding world of social media, Facebook is still king. Facebook lit a fire under the trend of sharing information, both personal and professional, via the Internet. Growth in the area of social media shows no signs of slowing down with increased significance being placed on this medium as a means of generating revenue for many media companies.
With rivals like Twitter and LinkedIn still growing and in many cases, figuring out how to generate revenue, Facebook in many ways still has a leg up on the competition. But despite learning how to make money, the company’s IPO did not go as smoothly as many had hoped. While the stock certainly did have a catalyst for movement, the general movement of the stock has been downward, losing up to 18 percent within the first few days of trading. Currently trading around $32, the stock has traded under its offering price since the first trading day after the IPO.
H = Honest Accounting Governs the Company Books
Although Facebook’s accounting seems legit, the U.S. Securities and Exchange Commission has announced that it will launch an investigation into the company’s IPO. The investigation comes after reports that the deal’s lead underwriter, Morgan Stanley, told large institutional clients about a reduction in the company’s revenue forecast during the IPO roadshow weeks ago. According to allegations, Morgan Stanley made their largest clients aware that the company could potentially lose money, but left smaller investors in the dark. This inquiry and a flood of investor lawsuits could plague the shares for a long time to come.
With so much upheaval surrounding such a new stock, some will be tempted to stay far away while others will want to buy in when the stock sells off. Buying into Facebook definitely comes with a high level of risk and no one can foresee how the markets will adjust the stock’s price over time because the valuation is extremely high. For many, it would be prudent to take a “wait and see” approach, but for those who fear that they are missing out on the next Apple Inc. (NASDAQ:AAPL), Google, or Microsoft (NASDAQ:MSFT) it would be wise to only invest what you can afford to lose.
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