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Shares of Facebook
Let's dig into the details of this slow-motion Face-plant to figure out whether there's a rebound in Facebook's future.
How it got here
Facebook and its peers (or at least the companies with which it's most often compared) have taken divergent paths since the company went public with the largest IPO valuation of all time. While many large, established tech companies have staged a yearlong surge, recent tech IPOs are in the middle of a gloomy dot-com bust. You can see the difference in the following chart, which pits globe-straddling social whale Facebook and its parasitic lamprey Zynga
For Zynga, it's partially that really lousy earnings have undercut any fleeting optimism. It's also partially that the optimism that was there is tied to Facebook, while the wave of publicity that hit Facebook's IPO process turned up a few more rocks than Zynga shareholders may have felt comfortable with. The stock started falling right around the time heavy publicity started:
Google, Apple, and Yahoo! are all mature enough for their stocks to fall more closely in line with their earnings, and that's reflected by the change in net income over the past two years:
Facebook had the good fortune to go public at a tremendously high valuation. It's now down more than 50% from its first day. That doesn't mean it was a bad IPO. It was a fantastic IPO -- for Facebook. That's the argument dot-com 1.0 darling and Dallas Mavericks owner Mark Cuban made earlier this week, responding to a New York Times editorial blasting the company's CFO. Investors have to keep in mind that the primary purpose of an IPO is typically to bring new money into the company for its future expansion. Facebook performed that task phenomenally well, Cuban argues, as it raised about $10 billion this May.
So the IPO was great for Facebook, but lousy for investors. Is it about to become worthwhile? Let's drill down into some key numbers to find out.
What you need to know
What you'll quickly notice is that Facebook isn't particularly exceptional, all things considered -- except in terms of its P/E ratio:
Price to Levered Free Cash Flow
Net Margin (TTM)
Projected Growth Rate (2013)
Source: Yahoo! Finance. TTM = trailing 12 months. NM = not material; negative results.
This isn't necessarily fair to Facebook, as it took a major one-time earnings hit in its June quarter thanks to the IPO. Its P/E should drop somewhat as it generates more stable income. However, its projected growth rate isn't particularly impressive when compared with that of Google or Apple, which are worth several times Facebook's market cap despite much more reasonable P/E ratios.
However, a P/E isn't everything, and analysts have been wrong before. Our Foolish contributors have offered a few nuanced takes on why the market might click "Like" on Facebook's stock again. Evan Niu points out that a very bullish (but frequently correct) Apple analyst just predicted a long-term Facebook doubling. Rick Munarriz offers three reasons that Facebook's worth it now, including the company's new mobile Sponsored Stories. Sean Williams, who's often willing to take data-backed contrarian positions, points out that Facebook's integration efforts with both Apple and Google products makes it a good long-term bet that traffic (and thus ad revenue) should keep improving.
What's next for Facebook? Zuckerberg's probably getting tired of all the media attention, and so is Facebook's stock. A reasonably quiet, boring period will probably be good for the stock, but that will require Facebook to not do anything newsworthy, a virtually impossible proposition right now.
Facebook also needs to figure out how to improve its average revenue per user, which is one of the lowest of any major consumer-focused online sites. That should have a larger long-term impact on the company's earnings potential than anything else, as it's already running up hard against the Law of Large Numbers when it comes to user growth.
If you believe Facebook's woes are nearly over -- or if you'd just like to stay on top of the Facebook situation -- then you should subscribe to the Fool's new Facebook premium research service. You don't need a million friends to know when something big is happening in Palo Alto, because the Fool has you covered with a full year of regular updates. Subscribe today.
The Motley Fool owns shares of Apple and Facebook. Motley Fool newsletter services have recommended buying shares of Google, Facebook, and Apple and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.