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Facebook, Inc (NASDAQ:FB) has lost many friends; insiders are selling their stake in the company. On Thursday when the lock-up expired 157.6 million shares traded.
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Another 1.5 billion shares and stock options will unlock from October 15-November 14 threatening to drive the stock price even lower than its current price which is hovering at $19 (half its IPO price).
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As the market re-evaluates Facebook Inc (NASDAQ:FB), we take a look at its fundamentals. Our scores and ratings for Facebook, Inc. are computed relative to its peers. The peers included in our comparison are:
Microsoft Corporation (NASDAQ:MSFT)
Google Inc (NASDAQ:GOOG)
Yahoo! Inc. (NASDAQ:YHOO)
Linkedin Corporation (NYSE:LNKD)
IAC/InterActiveCorp. (IACI)
Renren Inc (NYSE:RENN)
Google Inc (NASDAQ:GOOG) scores a 78 for its Fundamental Analysis while Yahoo! Inc. (NASDAQ:YHOO) scores 28. At 64, Facebook, Inc (NASDAQ:FB) lies between the two ends of the spectrum. CapitalCube’s scores are based on star-ratings for the stock across various attributes; more here.
Table of Contents
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Fundamental Analysis
Relative Valuation
Facebook, Inc (NASDAQ:FB)’s current Price/Book of 3.1 is about median in its peer group.
Valuation Drivers
Turnaround
The market expects faster earnings growth from FB-US than from its peers and also a turnaround in its current ROE.
Operations Diagnostic
Problematic
FB-US’s relatively low net margins and poor asset turns suggest a problematic operating strategy.
Earnings Leverage
Leader
The company’s year-on-year change in revenues and earnings are better than the median among its peer group.
Sustainability of Returns
Over the last five years, FB-US’s return on assets has declined from about median to less than the median among its peers suggesting that the company’s historical competitiveness in operations is slipping away.
Drivers of Margin
The company’s relatively high pre-tax margin suggests tight control on operating costs versus peers.
Growth Expectations
Superior
Compared with the peers chosen, FB-US has had faster revenue growth in prior years and a current PE ratio that suggests faster growth in the future suggesting superior growth expectations.
Leverage & Liquidity
Quick and Able
FB-US has the financial and operating capacity to borrow quickly.
Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day’s close unless otherwise stated.
Overview
- Facebook, Inc.’s current Price/Book of 3.1 is about median in its peer group.
- The market expects faster earnings growth from FB-US than from its peers and also a turnaround in its current ROE.
- FB-US’s relatively low net margins and poor asset turns suggest a problematic operating strategy.
- The company’s year-on-year change in revenues and earnings are better than the median among its peer group.
- Over the last five years, FB-US’s return on assets has declined from about median to less than the median among its peers suggesting that the company’s historical competitiveness in operations is slipping away.
- The company’s relatively high pre-tax margin suggests tight control on operating costs versus peers.
- Compared with the peers chosen, FB-US has had faster revenue growth in prior years and a current PE ratio that suggests faster growth in the future suggesting superior growth expectations.
- FB-US has the financial and operating capacity to borrow quickly.
FB-US has traded publicly for less than a year.
FB-US’s shares have traded publicly for less than a year. Over the last one month, however, the company’s share price has relatively underperformed with a return of -32.2% vs. peer median of -2.4%.
Drivers of Valuation: Operations or Expectations?
Valuation (P/B) = Operating Advantage (ROE) * Growth Expectations (P/E)
Price/Book or P/B valuation is a function of the observed operating performance of the company as measured by ROE multiplied by the market’s current implied growth expectation as measured by the P/E. We define Valuation Premium as the difference between the Market Capitalization and Book Value of Equity, and as a proxy for the NPV of cash-flow associated to the Book Equity investment.
Based on the analysis of the relative contribution to the P/B valuation of “Operations ROE” vs. “Expectations P/E”, we quickly garner insight into peers comparative performance and the market’s assessment of their strategies – are they just “Harvesting” the current business pipeline or are investors betting on a strategic “Turnaround”?
FB-US has a Turnaround profile relative to its peers.
The market expects FB-US to grow faster than the median of its chosen peers (PE of 83.6 compared to peer median of 25.4) and to improve its current ROE of 3.8%. Thus, the market seems to expect a turnaround in FB-US’s current performance. The company’s current Price/Book of 3.1 is about median in its peer group.
FB-US did not have a traded price at the last year-end.
FB-US’s ROE continues to trend downward and is below (but within one standard deviation of) its five-year average ROE of 4.6%. Though its ROE decreased to 3.8% from 13.8% (in 2011), its peer median remained relatively stable during this period at 8.7%. Relative to peers, ROE fell 10.3 percentage points (and is now also lower than its peer median).
FB-US’s trading price information is available only after its last year-end filing date (i.e. 2011-12-31).
Operations Diagnostic
FB-US’s relatively low net margins and poor asset turns suggest a problematic operating strategy.
The company does not seem to have a viable operating strategy as is evident from low net profit margins (currently 11.8% vs. peer median of 22.1%) and poor asset turns (currently 0.3x compared to peer median of 0.6x). We classify this operating model as problematic relative to its peers.
FB-US has moved to a Problematic from a relatively low asset turnover profile at the recent year-end.
FB-US’s net margin continues to trend downward but is still within one standard deviation above its five-year average net margin of -4.7%. The decrease in its net margin to 11.8% from 26.9% (in 2011) was also accompanied by a decrease in its peer median during this period to 22.1% from 23.0%. Net margin fell 14.3 percentage points relative to peers (and is now also lower than its peer median).
FB-US’s asset turnover is its lowest relative to the last five years and compares to a high of 1.0 in 2010. Though its asset turnover decreased to 0.3 from 0.4 (in 2011), its peer median remained relatively stable during this period at 0.6. Overall, asset turnover and net margin trends suggest that FB-US’s ROA at 3.4% has maintained its downward trend and is below (but within one standard deviation of) its five-year average ROA of 5.5%.
Earnings Leverage
Year-on-year change in revenues and earnings are above the median among its peers.
The company enjoys both better than peer median annual revenue growth of 88.0% and better than peer median earnings growth performance 65.0%. FB-US currently converts every 1% of change in annual revenue into 0.7% of change in annual reported earnings. We view this company as a leader among its peers.
Sustainability of Returns
Relative to peers, recent returns have declined versus last five years.
Drivers of Margin
Relatively high pre-tax margin suggests tight control on operating costs versus peers.
FB-US has maintained its relatively high pre-tax margin profile from the recent year-end.
Growth Expectations
FB-US’s revenue growth and share price suggest faster growth in the future.
FB-US has grown its revenues faster than its peers (68.4% vs. 17.5% respectively for the past three years). The market also sees relatively higher long-term growth prospects for the company, giving it a better than peer median PE ratio of 83.6. Overall, we classify the company’s growth prospects as superior relative to its peers.
Key Valuation Items
| Company | Market Cap(mn) | Price / Book | Price / Earnings | Dividend Yield (%) |
|---|---|---|---|---|
| Microsoft Corp. | 259,047.0 | 3.9 | 15.5 | 2.6 |
| Google Inc. Cl A | 221,447.0 | 3.4 | 19.1 | 0.0 |
| Yahoo! Inc. | 17,804.8 | 1.4 | 17.1 | 0.0 |
| LinkedIn Corporation | 10,714.3 | 13.7 | 846.8 | 0.0 |
| IAC/InterActiveCorp. | 4,582.0 | 2.4 | 25.4 | 0.7 |
| Renren Inc. Cl A ADS | 1,036.1 | 0.9 | 53.7 | 0.0 |
| Facebook, Inc. | 40,812.1 | 3.1 | 83.6 | 0.0 |
| Peer Median | 17,804.8 | 3.1 | 25.4 | 0.0 |
| Best In Class | 259,047.0 | 13.7 | 846.8 | 2.6 |
Company Profile
Facebook, Inc. is a social networking service and website. It aims to make the world more open and connected. 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 (apps) and websites that integrate with Facebook to reach its global network of users and to build products that are more personalized, social, and engaging. Advertisers can engage with more than 800 million monthly active users on Facebook or subsets of its users based on information they have chosen to share such as their age, location, gender, or interests. The company offers advertisers a unique combination of reach, relevance, social context, and engagement to enhance the value of their ads. Facebook was founded by Mark Elliot Zuckerberg, Dustin Moskovitz, Chris R. Hughes and Eduardo Saverin on February 4, 2004 and is headquartered in Menlo Park, CA.
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