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Why Facebook Inc (FB) Underperforms the Stock Market

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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 Inc (NASDAQ:FB)

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.

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