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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Facebook

May 18th 2012 Facebook
Nasdaq Symbol: FB
Industry: Internet
Price as of 5/18: $38.23

The broader market is in the middle of a correction from the first day of May. Sell in May and go away is in full swing. A number of sectors like energy, industrials, and materials look very attractive, but could easily fall further. Defensive sectors like utilities, consumer staples, and healthcare have held up better. A U.S. centric sector like retail is holding up as many investors flee any sector with exposure to Europe and other slow growth regions. The best sector so far this year has been tech. Apple got the sector off to a good start rallying over 50% in the first quarter pushing the Nasdaq up nearly 20%. Since the start of April, Apple has succumbed to profit-taking as other techs like Google have stepped up to take the baton. This week a new tech titan came public. The featured stock of the week is Facebook. On Thursday of this week, Facebook settled on 421.1 million shares with an IPO price of $38, higher than the $34-$38 expected price range, raising gross proceeds of about $16 billion, the third largest IPO in history. The whole investment world was focused on Facebook Friday as the IPO pop wasn't the pop many were expecting. A great company, but the stock is a question mark in the short term. This week we'll simply highlight Facebook, laying out the facts and fundamentals for the social network titan.

Facebook is the world's largest social networking company with an unprecedented reach of over 900 million users penetrating an astounding 10% of the world's population. It generates revenue from two primary means: advertising which accounts for 88% of revenue and fees associated with its payments infrastructure which is 12% of revenue. This revenue enables users to purchase virtual and digital goods from third party developers like the sale of virtual goods used in social games, most notably from Zynga.

Looking forward, Mobile of course is another focal-point for the company and represents an area of significant growth potential. Mobile Monthly Active Users have been growing rapidly, increasing by 69% year over year to 488 million as of March 31, 2012. Its user growth is the good news. The not so good news is that Facebook has been pretty clear that monetizing this growing mobile base is not going to be easy. In fact, on May 10, in another amended filing, Facebook warned that "growth in mobile may negatively affect the company's revenue and results."

Looking at its financials, in 2011, Facebook's revenue increased by 88% to $3.71 billion, after growing by 154% in the year before. Its' operating income jumped by 70% to $1.76 billion. For the first quarter, Facebook's revenue was up 45% annually to $1.06 billion, but down 6% sequentially, and its operating income fell by 2% year over year to $381 million. Facebook's balance sheet is strong with cash & equivalents of $3.9 billion and no long term debt. In terms of valuation, Facebook is trading for over 20 times sales and 75 times earnings. That doesn't compare well with Apple or Google which are growing faster and trade at a much lower valuation. Both Google and Apple trade for just 14 and 12 times earnings. In the short term, Facebook is not trading on valuation, but more on demand from global investors and closet indexers and mutual fund managers. But with more shares coming to the market in the coming months, Facebook may face a lot of headwinds in the short term.