With shares of Facebook (NASDAQ:FB) trading at around $30.17, 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:

C = Catalyst for the Stock’s Movement

Facebook is one of the most heavily traded stocks throughout the broader market. This indicates heightened interest in the story. As we all know, the public jumped in big time on Facebook, and unless the timing was impeccable, most of those investors are saddled with a loss at the moment. Due to Facebook being a household name and being surrounded by an extraordinary amount of hype, retail investors expected Apple-like (NASDAQ:AAPL) returns. Facebook will never be Apple! That is a guarantee. Through incredible innovation, Apple created and sold products (and still does) that changed the world. Facebook might be popular, but it’s still just a company that is attempting to monetize a website. This doesn’t mean Facebook will fail. Rather, it will be around for a long time. The disconnect is with expectations.

One potential driver for Facebook is Mark Zuckerberg. He’s highly intelligent, but more importantly, he knows what to say and how to say it. Sometimes a charismatic leader can spread optimism with great effectiveness and everyone ends up buying into the story, which can actually change the situation for the better despite challenging conditions. At the same time, a pessimist would look at this as manipulation.

Mr. Zuckerberg recently made many significant statements. One of these statements was: “we’re not operating to maximize our profits this year.” That may be true, but if the results are still less than impressive next year, he will no doubt use different wording to get the same message across. He was honest in stating that costs exceed revenue growth right now. This, by the way, isn’t a good sign. As far as Social Graph goes, Zuckerberg stated, “We built the most interesting product with Social Graph.” To summarize the remainder of that statement, the goal is to refine Social Graph through social connections and serving app developers and advertisers before focusing on monetization down the road. Once again, the theme here is potential, not actual results. Perhaps the brightest spot with Zuckerberg’s comments was when he stated that “Facebook mobile app accounts for 23 percent of all time spent on apps.”

As far as Q4 goes, EPS came in at $0.17 on $1.58 billion in revenue. Monthly Active Users were up 25 percent year-over-year, Daily Active Users were up 28 percent year-over-year, and Mobile Monthly Active Users were up 57 percent year-over-year. Mobile revenue is now 23 percent of total ad revenue. On the negative side, operating costs increased 67 percent to $849 million, and operating margin dropped from 48 percent to 33 percent.

Let’s take a look at some important numbers for Facebook prior to forming an opinion.

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio and balance sheet for Facebook are strong. The former is expected, and the latter is a key positive in this story. We will cover why in the Conclusion section.   


T = Technicals on the Stock Chart Are Mixed  

Facebook has been out-performing Google Inc. (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT), but it looks as though this trend is about to reverse course. Microsoft is the only company of the three that offers yield, which is 3.30 percent.


At $30.17, Facebook is currently trading above all its averages.   

50-Day SMA


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E = Earnings Have Been Improving      

Earnings and revenue have consistently improved on an annual basis.


We already know what happened this quarter. Now let’s take a look at previous quarters.


T = Trends Support the Industry

Facebook now classifies itself as a mobile company, which shows foresight. The mobile market is growing at a rapid pace, and Facebook is attempting to set itself up to profit from this steadily expanding market.


On the positive side, Facebook is increasing its users, the balance sheet is strong, cash flow is good, growth is impressive in Asia, and the CEO is tenacious. When you combine a strong balance sheet with a tenacious CEO, you have a formula for good potential. If Facebook fails to grow organically, or at least fails to grow at the rate of expectations, then Facebook will attempt to grow through acquisitions.

On the negative side, growth in the United States has slowed, the valuation is high with a Trailing P/E of 161.87 and a Forward P/E of 35.91, and it would be difficult to imagine a scenario in which a significant catalyst will suddenly appear and lead to Facebook meeting Wall Street’s expectations on a consistent basis.

The bottom line is that Facebook is a decent stock, not an exceptional stock. Once the masses figure this out, there will be less disappointment. As far as the title goes, it is possible that Facebook has already peaked at $45. There might be a run past $45 in the future, but the odds of that run being sustainable would be slim.

Facebook is rated a neutral WAIT AND SEE.