Facebook Inc (NASDAQ:FB) has been hit with a fairly strong wave of panic selling. Since its IPO the stock has lost a lot of its value, but that doesn’t necessarily mean that the business is too expensive. Quite the opposite–let’s take a close look at how the company is positioning itself.
Facebook underperforms the QQQ
Since its IPO Facebook has run into a lot of issues. Perhaps the biggest nightmare is Facebook’s messed up attempt at creating a mobile phone operating system, paired with the rapidly rising costs of running the business that weren’t anticipated by the shareholders.
Source: Ycharts
Anyone who had bought a diversified portfolio of tech stocks like the QQQ ETF would have been able to outperform Facebook. Over the course of two years Facebook Inc (NASDAQ:FB) has declined by 36.41%, while the average tech company did much better.
Rising expenses could be temporary
Facebook Inc (NASDAQ:FB) has been having difficulty with spending cash intelligently.
Source: Ycharts
The company’s spending across cost of goods sold, research and development, and SG&A have all gone up exponentially since the date of the IPO, which has reduced the amount of net profit the company has been able to report. The shareholders aren’t too thrilled with the rapid increase in spending.
The company used a lot of resources to create Facebook Home, which totally bombed. The product wasn’t very useful, and HTC stopped shipment of phones with the Facebook Inc (NASDAQ:FB) operating system. The price had to be cut down to $0.99, as AT&T discontinued the Facebook phone because users found the experience to be terrible.
To be fair, though, the company had to record around $986 million in restricted stock unit compensation, which has to be recognized as an expense. The FASB, back in 2004, required employee expense treatment for stock options and restricted stock for an annual period beginning in 2005. Because of this, Facebook Inc (NASDAQ:FB)’s decline in earnings is likely to be temporary, as the company’s restricted stock compensation expenses are likely to be temporary.
Analysts anticipate that the company will grow earnings by 29.19% on average over the next 5 years. This will be driven by revenue growth, falling stock compensation expenses, along with better cost management. Hopefully, Facebook Inc (NASDAQ:FB) keeps a closer eye on its piggy bank because its been frustrating to watch the company waste shareholder capital on projects like Facebook Home.
Other alternatives
Because Facebook Inc (NASDAQ:FB) could take a while to better monetize social advertising, investors should consider other investment opportunities.
Google Inc (NASDAQ:GOOG) is a compelling alternative. The company is expanding internationally and has a whole host of products ranging from internet services, wearable computing, and software services hitting the market. Not to mention Google is turning YouTube into a paid for content site that could imply even further upside.
Analysts on a consensus basis anticipate Google to grow its earnings by 20.64% on average over the next 5 years. The company’s 25.9 earnings multiple is slightly expensive relative to growth, but it is still pretty reasonable in light of the company’s consistent history of growing earnings.
Amazon.com, Inc. (NASDAQ:AMZN) is partnering with Google to launch Amazon market place across 200 countries worldwide, which should help to increase application distribution. Amazon could earn some fees by providing an effective and large marketplace for application developers in developing markets.
Amazon is continuing to expand its retail services internationally, not to mention the company was able to grow its cloud services by 47.3% year-over-year in its most recent quarter. The company is doing an excellent job of expanding its cloud unit. Amazon’s cloud segment is still far from market saturation, what with AT&T Inc. (NYSE:T) projecting cloud to be a $210 billion market by 2017. We can also rely on Amazon’s ever-expanding international retail business for further growth.
Conclusion
Facebook Inc (NASDAQ:FB) was sold off because the company favored heavy investment over intelligent spending. Now, I encourage companies who want to invest into growth, but it should be done methodically.
Google and Amazon are attractive alternatives, but if investors are patient, Facebook could turn around its company’s stock performance by doing a better job of cutting costs and investing cash intelligently.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Facebook, and Google. The Motley Fool owns shares of Amazon.com, Facebook, and Google.
The article Why Facebook Underperforms the Stock Market originally appeared on Fool.com.
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