Past Performance: Facebook (FB) is still too new to go too in-depth into the past performance of the stock. Facebook has only been public long enough to have reported three quarters of earnings versus Wall Street expectations. Out of those three quarters, Facebook has met expectations once and beaten expectations twice. Facebook's mobile ad revenue grew by 100% between the third quarter of 2012 and the fourth quarter of 2012. Wall Street is sure to be looking at mobile ad revenue growth hard.
The Fundamentals: Facebook currently has a P/E north of 1,000, a Forward P/E of 34.51, a P/S of 13.03, and a PEG ratio of 1.68. In comparison, the technology sector has a P/E of 22.2, and a Forward P/E of 13.6. The S&P 500 has a P/E of 20.5, and a Forward P/E of 17.7. Using those metrics tells you that Facebook is extremely overvalued. However, Facebook is an aggressive growth company that is still less than a year old as far as trading days go. The entire story on Facebook is growth. The usual fundamentals can only tell you so much about them. I am closely watching the PEG ratio and Forward P/E ratio. If each metric begins to come down to reasonable levels (PEG of less than 1, and a Forward P/E equal to the S&P 500 or less) I would expect a massive move upward, assuming revenue growth is still growing at a reasonable rate north of twenty percent YOY.
The Story: We all know the horrific performance FB had during the IPO, falling from north of $40 per share to less than $20 per share. Since that time, Facebook has rebounded more than 42% to current levels. While I am not a fan of trading via charts, Facebook seems to have a beautiful cup and handle pattern which usually comes before a spike upward.
The most impacting news out of Facebook during the earnings release will be mobile ad revenue. Expectations are currently for Facebook to match fourth quarter of 2012 mobile ad revenue of $306 million. The fourth quarter ad revenue typically receives a boost from the holiday shopping ad season. If Facebook fails to meet these expectations, there could be downside risk that will test the $25 per share support level. Conversely, if Facebook is able to beat the mobile ad revenue expectations, stave off shrinking profit margins, and continue to show innovation in monetizing the social networking industry, Facebook could break out of the current channel they have been trading in and break north of $31 per share.
How to Play It: Facebook will continue to face lofty expectations on Wall Street. "The first person through the wall always gets a little bloodied" is a perfect line from the movie Moneyball in this situation. Facebook is being considered the first publicly traded consumer based social networking site, and they need to continue to show innovation and massive revenue growth. Wall Street understands that Facebook will struggle slightly with profit margins as the company continues to unveil new monetization techniques (ie the Gift program, Instagram, the new News Feed, and other techniques).
While the expectations are lofty, it is really for each investor to decide whether they believe Zuckerberg is the next great innovator or not. Facebook is the ultimate risk/reward play still in the infancy stage. Keep in mind, Facebook is just now reaching ten years of business. As Facebook unveils new products and modes of monetization, we should see the company test the original IPO price before year end. My personal 52-week price target: $44.70.
Disclosure: I am long FB.
Additional disclosure: Always consult with a registered financial professional before adding any position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.