A Closer Look at Facebook's Fundamentals

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Dec 17, 2014

In this article, let's take a look at Facebook (FB, Financial), a $208.22 billion market cap company, which is one of the world's largest Internet companies, based on users and market capitalization.

Key Drivers

The internet software and services industry is highly competitive. Further, technological changes are always a threat to the 4,000 companies, with combined annual revenue of approximately $30 billion.

Facebook is the number one page when considering people navigating on internet pages. Almost 1 billion people use this page daily, spending more time on it than any other. Active users per month exceed 1.3 billion.

The company's growth is very attractive. The past October, the firm acquired WhatsApp in a deal valued at $19 billion. In July, it acquired Ocululs VR, a leading developer of immersive virtual reality technology. The company focuses on finding new and innovative ways to increase advertising. Facebook is in a privileged position to collect data about users as well as their activities, so this database is highly valuable to advertisers.

Some Risks

Although this firm is skyrocketing, it must be aware of regulatory changes that could affect its advertising platform. Moreover, it cannot abuse advertising.Â

Revenues, Margins and Profitability

Looking at profitability, revenue grew by 58.95% and led earnings per share to increase in the most recent quarter compared to the same quarter a year ago ($0.30 vs $0.17).

The company has good margins, for example, in 2011 its operating margins was 45% and net margins over 25%. In 2012, those margins were affected by investments and tax rates. The currently net margin is at 24.66% which is ranked higher than 91% of the 478 Companies in the Internet Content & Information industry.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
FB Facebook 16.28
EBAY eBay Inc -0.61
YHOO Yahoo! Inc 43.83
BIDU Baidu Inc 30.80
LNKD LinkedIn Corp -0.54
 Industry Median 6.09

The company has a current ROE of 16.28% which is higher than the industry median and the ones exhibited by eBay (EBAY, Financial) and LinkedIn Corp (LNKD, Financial).

In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Yahoo! (YHOO, Financial) and Baidu (BIDU, Financial) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

03May20171229011493832541.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 73.0x, trading at a discount compared to an average of 96.3x for the industry. To use another metric, its price-to-book ratio of 9.45x indicates a premium versus the industry average of 3.71x while the price-to-sales ratio of 17.34x is above the industry average of 3.35x.

As we can see in the next chart, the stock price has an upward trend in the five-year period.

03May20171229021493832542.png

The stock has surged by 57.41% over the past year, outperforming the S&P 500 Index.

Final Comment

Facebook is the world's largest online social network. We think that growth in the future will be achievable as the firm could adapt to new technologies while improving their services. It is difficult for me to think that people could leave it, so I feel bullish on this stock.

The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.

Hedge fund gurus like Steve Mandel (Trades, Portfolio), Ray Dalio (Trades, Portfolio), John Burbank (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio) have added this stock to their portfolios in the third quarter of 2014, as well as Pioneer Investments (Trades, Portfolio), Ron Baron (Trades, Portfolio), RS Investment Management (Trades, Portfolio) and Caxton Associates (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned