Thursday, November 5, 2015

Facebook Crushes Earnings

Yesterday Facebook Inc. (FB) reported earnings. You can read the earnigns report here.

The company is blowing it out on revenues as they increased by 40.6% from the same quarter a year ago. The company has still seen solid increases in daily and monthly active users.  Despite the company spending aggressively they managed to increase their cash position to $15.3 billion, which is up from $14.1 billion in the previous quarter. The company has an awesome balance sheet no doubt. I think a big reason the shares are up is the company has announced it's plan to aggressively monetize it's Instagram App. That will help drive revenue growth into the next year at least.

On a Non-GAAP diluted basis the company has earned $2.03/share the last year. Using GAAP diluted results the company has earned $0.99/share. Quite the difference between the two formats. I'm a proponent of GAAP results over Non-GAAP. Using GAAP results that gives the company a P/E over 108. While not always the best barometer of a stock price the current P/E ratio is extremely high. I like the inverse which translates into an earnings yield per share. For each share you own you can expect a 0.92% return from earnings. Comparing this to another one of our picks, Cummins Inc, where both trade at roughly the same price plus you get a near 9% yield from earnings. This is the way I look at it. If I was going to start my own business would I expect to get 1% at the end of the year, or 9% from my money?

That's the downside as FB is trading at an extremely high premium. Today the company is now worth over $300 billion dollars. This puts Facebook right up there with the likes of Berkshire Hathaway, Exxon Mobil, Apple, Wells Fargo, and Microsoft. That's one reason why I'm not adding to the shares as I have been with other companies on the list after earnings. The stock is quite expensive at this point. Yet the company has an extreme competitive advantage that is clearly paying off. Advertisers are flocking to the site left and right as their ROI is huge. FB is still a great hold for the long haul, but if you were looking to add shares to your personal portfolio this price level presents more risk than it did a few weeks ago when shares were trading in the $80-$90 area. While growth stocks represent the greatest capital appreciation opportunities they also offer investors the quickest downturns.

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