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Martim Macedo
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I enjoy doing research and analyzing companies, hoping to find good investment opportunities. I'm Portuguese, a big fan of Warren Buffet and looking to share and discuss my ideas with other investors.
  • Facebook Is Still Too Risky 0 comments
    Mar 8, 2013 1:48 AM | about stocks: GOOG, FB

    It's been almost 9 months since Facebook (NASDAQ:FB) made its IPO and, since then, the biggest challenge for the company has been to increase net income in order to justify its market valuation. Let's not forget that 2011 net income was $668 million and the company reached a market cap of $90 billion after the IPO, apart from more recently been trading near $60 billion.

    The most recent effort to increase results was just announced with the changes in the News Feed (will now include bigger photos, and information will be organized into topics) so let's try to analyze if it can be a meaningful event that can justify investing in the company at current prices.

    The company summarized the changes as a personalized newspaper, trying to make ads richer and, hopefully, make more money from them. For the shareholder, the fundamental aspect is if it will affect the user experience and if it will increase revenue and improve profitability.

      Q4 2012 Q3 2012 Q2 2012 Q1 2012
    -Revenue (millions) $1,585 $1,262 $1,184 $1,058
    -Operating income (millions) $523 $377 ($743) $381
    -Net income (millions) $64 ($59) ($157) $205
    -Cash and equivalents (millions) $9,500      
    -Long term liabilities (millions) $2,300      
    -Total equity (millions) $11,755      

    As we can see above, in the last 4 quarters, revenue has been increasing, reaching $5 billion for 2012, and almost doubling from 2010. Excluding extraordinary events (share based compensation expense of $1.3 billion in 2012), in the year, the operating income would have reached $1.8 billion and net income would have been $1.2 billion.

    Regarding the balance sheet, it is very healthy, with almost $10 billion in cash and equivalents at the end of last quarter, $2 billion in long term debt, and $11.7 billion in total equity. Also, the company is carrying only $587 million in goodwill.

    At around $28 per share, the company is trading at around $67 billion, almost 56 times 2012 net income (excluding the share based compensation expense), and almost 6 times book value. In order for this valuation to make sense, a significant increase in profits is expected in the future. If the changes that the company introduced today will impact significantly the results of the company, or not, will have to be seen .

    As a user, if the changes start affecting the way I use Facebook, namely the easy way that I manage to keep up with my friends, I might feel tempted to give a try at Google+ (NASDAQ:GOOG).

    The challenge that Facebook continues to face since it became a publicly traded company is to increase results in order to catch up with the generous market valuation. If the new News Feed will manage to do that or not is yet unknown but, as an investment, at current market prices, it is simply too risky to pay 56 times expected earnings and hope that they manage to double net income a couple of times, without risking the user experience.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: GOOG, FB
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