Is Facebook Stock a Thumbs Up?

With shares of Facebook (NASDAQ:FB) trading around $26, is FB an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Facebook is engaged in building social products in order to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about. Developers can use the Facebook platform to build applications and websites that integrate with Facebook to reach its global network of users, and to build personalized and social products. Advertisers can engage with more than 900 million monthly active users on Facebook, or subsets of its users, based on information they have chosen to share.

Social networking has been a powerful movement and tool in recent years, and has had a major influence in the way many companies and consumers operate daily. The company's mobile app has reached 100 million users, and the simple app is most heavily used in emerging markets, where data speeds are usually slower. The company said it wants people around the world to have access to Facebook's mobile app, without having to purchase a smartphone or live in a location that offers high-speed data.

T = Technicals on the Stock Chart are Strong

In the last year, Facebook stock seems to be finding value in the $20 price zone. The stock is seeing a slight bounce, in anticipation of an earnings announcement coming in just a few days. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Facebook is trading slightly above its key averages, which signal neutral to bullish price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Facebook options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Facebook Options	44.04%	93%	90%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
August Options	Flat	Average
September Options	Flat	Average

As of today, there is an average demand from call buyers or sellers, and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts, and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates, and what that means for Facebook’s stock.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions can help gauge investor sentiment on Facebook’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Facebook look like, and more importantly, how did the markets like these numbers?

	2013 Q1	2012 Q4	2012 Q3	2012 Q2
Earnings Growth (Y-O-Y)	0.00%	-89.46%	-120.00%	-172.73%
Revenue Growth (Y-O-Y)	37.81%	40.14%	32.29%	32.29%
Earnings Reaction	5.61%	-0.83%	19.12%	-11.69%

Facebook has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Facebook’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Facebook stock done relative to its peers, Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), LinkedIn (NASDAQ:LNKD), and the overall sector?

	Facebook	Google	Microsoft	LinkedIn	Sector
Year-to-Date Return	-2.06%	28.59%	19.47%	71.46%	17.81%

Facebook has been a poor relative performer, year-to-date.

Conclusion

Facebook is a pioneer in the social networking space, and strives to provide a valuable experience for its users, developers, and advertisers. The stock is now seeing a bounce, in anticipation of an earnings announcement expected in a few days. Over the last four quarters, investors in the company have had mixed feelings about the company, as earnings have been decreasing, while revenue figures have been increasing. Relative to its peers and sector, Facebook has been a poor year-to-date performer. WAIT AND SEE how Facebook reacts to the coming earnings release.