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Until Facebook Inc (FB) Can Explain What It Is, Avoid It

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Facebook Inc (NASDAQ:FB) had a rather bumpy annual meeting this week.

What was most amazing about the meeting wasn’t that it was about the stock price – still stuck below the $38 IPO price – or the frankly silly questions asked by shareholders who appear not to understand the nature of what they’ve bought.

What was most amazing were the answers, a collection of mishmash and buzzwords indicating even Facebook Inc (NASDAQ:FB) management doesn’t know what they are, or even what they want to be.

Facebook Inc (NASDAQ:FB)

What Facebook is

Facebook Inc (NASDAQ:FB) is, essentially, a cloud applications shop. Its basic application is its directory, just as Google Inc (NASDAQ:GOOG)‘s basic application is search.

The company has been investing heavily in infrastructure, and in programming, but what it has mainly done with all this is simply enhance the base service, or try to extend it into other platforms like mobile.

Meanwhile some of its key attributes, like its game platform, remain unexplained and unexploited.

At his first annual meeting as CEO, Zuckerberg was tongue-tied trying to explain how all this fits together, and somewhat put-off by the technical naivete of questioners who had put their money into his company. That’s OK. But the fact that COO Sherry Sandberg, a more experienced executive, couldn’t or didn’t save him should have troubled investors both inside and outside the company.

It might be a good time to look at the numbers and see if tech investors can find a better horse to ride.

Facebook by the numbers

Facebook Inc (NASDAQ:FB) has now gone through four quarters as a public company, so it’s fair to see how it stacks up.

Over the last two quarters we are starting to see what we have. Facebook Inc (NASDAQ:FB) brought in about $3 billion in revenue over the last two quarters, with its operating margin averaging 30%. The seasonality seen at so many consumer stocks isn’t evident here, with sales for the March quarter coming in just short of those for the December quarter.

During those two quarters of “normalcy” Facebook has earned $283 million. Take that across a full year and you get earnings of about $550 million. Taken against a market cap of $58 billion, that still leaves you with a Price/Earnings (P/E) multiple of about 120, which isn’t too bad when compared with, Inc. (NASDAQ:AMZN), the company that Zuckerberg apparently takes as his exemplar.

The balance sheet shows that, if anything, Zuckerberg is pushing his company harder than even Bezos. In order to keep buying cloud infrastructure, the company has taken on $2.26 billion in debt, $1.92 billion of it long-term debt. While it has plenty of short-term investments in the bank to pay off this debt four times, it’s still an indication of how fast Zuckerberg wants his company to go.

In order to make the balance sheet and income statement look as good as they appear to, however, Zuckerberg has been sacrificing on cash flow. On a cash flow basis, the company actually dropped $59 billion last quarter, after generating $1.7 billion in cash during the last two quarters of 2012.

Yahoo!: A better place

Yahoo! Inc. (NASDAQ:YHOO) may actually be a better place for you to invest right now.

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