With shares of Facebook (NASDAQ:FB) trading around $23, 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 is engaged in building products to create utility for users, developers, and advertisers. 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 and websites that integrate with Facebook to reach its global network of users and to build personalized and social products. Advertisers can engage with more than 900 million monthly active users on Facebook or subsets of its users based on information they have chosen to share. Social networking has been a powerful movement and tool in recent years that has changed the way many companies and consumers operate. Facebook is a pioneer and a leader in the social network trend that looks to be here to stay. Facebook will see rising profits through its engagement with the increasing user base that social networking is seeing in coming years.
T = Technicals on the Stock Chart are Weak
Facebook stock has struggled to find a consistent valuation so it has experienced a fair amount of volatility since its initial public offering last year. The stock is now trading at lows for the year but may be getting ready 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 its key averages which signal neutral to bearish price action in the near-term.
(Source: Thinkorswim)
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 | 37.49% | 66% | 65% |
What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.
| Put IV Skew | Call IV Skew | |
| July Options | Steep | Average |
| August 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 significant 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 Mixed 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?
| 2013 Q1 | 2012 Q4 | 2012 Q3 | 2012 Q2 | |
| Earnings Growth (Y-O-Y) | 0.00% | -89.46% | -120.00% | -172.73% |
| Revenue Growth (Y-O-Y) | 37.81% | 40.14% | 32.29% | 32.29% |
| Earnings Reaction | 5.61% | -0.83% | 19.12% | -11.69% |
Facebook has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have been indecisive about Facebook’s recent earnings announcements.
P = Poor Relative Performance Versus Peers and Sector
How has Facebook stock done relative to its peers, LinkedIn (NASDAQ:LNKD), Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), and sector?
| | | | Microsoft | Sector | |
| Year-to-Date Return | -10.78% | 51.86% | 25.58% | 25.95% | 30.18% |
Facebook has been a poor relative performer, year-to-date.
Conclusion
Facebook allows consumers and businesses around the world to connect and engage through its widely used platform. The stock has struggled to find proper valuation since its initial public offering so its been all over the place. Over the last four quarters, investors in the company have been a bit confused as earnings have decreased and revenues have increased. Relative to its peers and sector, Facebook has been a poor performer year-to-date. WAIT AND SEE what Facebook does in coming quarters.
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