Using the checklist feature is a great tool to use to help you decide if you want to invest in a certain company. It’s a great way to guide your research and can also teach “newbie-investors” what to look for on the financial statements.
Last week, I used the Stalwarts checklist on Coca-Cola (KO, Financial). This week, I used Peter Lynch’s other checklist, the Fast Grower checklist, to rate Facebook (FB, Financial).
Please note that you must use a fast-growing company in order for this checklist to work accurately. Otherwise, the company will be inaccurately scored, and you may end up missing out on a great addition to your portfolio.
Let’s see what Facebook’s score was using the Fast Grower checklist.
1. Do I understand the business?
Yes. Facebook is a social networking site that allows users to stay connected with friends, family, co-workers, etc., by sharing pictures, status updates, locations and chat.
2. Does the company have a diversified customer base?
In early 2012, it was reported that the social media site has 845 million users, making it the most visited site on the internet. It was also recorded in early 2012 that 11% of the world has a Facebook account.
Because the company’s main goal is to connect people all over the world through the internet, I can confidently answer yes to this question. Facebook’s customer base is extremely diverse.
3. Does the company still have room to grow? Has the company duplicated its success in more than one city or town to prove that expansion will work?
Last winter, Facebook celebrated its 10-year anniversary and CEO and founder Mark Zuckerberg believes the company still has room for growth.
“I’ve spent a lot of late nights pacing around my living room with teammates just trying to plot out what our next move can be in order to keep pushing forward on this mission. But one of the big things that I’ve taken away from the last 10 years is, there’s always a next move, and you just need to keep on pushing forward and keep on doing the best thing that you can.”
Although the average number of teens has been declining, Facebook seems to be determined to appeal to all age groups and continue to maintain a diversified customer base.
4. Does the company have a meaningful margin?
Net margin is 25.16%
5. Does the company have a higher margin than competitors?
Yes, Twitter (TWTR, Financial) has a net margin of -48.57% and LinkedIn (LNKD, Financial) has a net margin of -0.75%.
6. Does the company have a stable margin or an even increasing margin?
Gross margin: Over the past 10 years, FB has had a stable gross margin. The lowest has been 73.20% and the median was 75.61. As of now, it is currently 82.36%, which is an increase, but not a dramatic one.
Operating margin: In 2012, operating margin plunged to -62.75
Share-based compensation expenses and an increase in the number of FB employees caused a decline inoperating margins.
Net margin: net margin plunged in 2012 to -13.26% and then increased to 15.02% and has gradually been increasing since then, although it has decreased slightly from the end of June, when it was at 27.18%.
7. Is the growth speeding up? Is the earnings growth to date consistent?
Analystspredict that earnings will grow at an average annual rate of 31.42% over a 5-year period. Analysts also predict an earnings increase of 117.95% over last year.
30 million active monthly users were added to the social media site during the third quarter and analysts predict the number of users will continue to increase.
Due to a lack of reliable internet services in the developing world, Facebook has decided to bring the internet to the people to respond to its slowing growth rate. Whatsapp is a way for the company to bring the internet to people all around the world.
One of the hurdles FB has faced is China’s block on the social media network, keeping 1.4 billion people from being able to access the site since 2009.
8. How did the company’s business fare during previous recessions?
During the recession, Facebook was able to generate a substantial amount of revenue.
In 2007, the company made around $150 million and up until then, it had been doubling its revenues.
In 2009 the company was able to generate revenue by putting more focus on advertising. Since then, advertising has been a strong focus for the company, as it continues to look for more ways to improve advertising in mobility.
9. How did the company’s stock price fared during previous recessions?
Looking at the Peter Lynch chart, it appears the the stock has been overvalued since the company went public in 2012. According to the chart, the stock has been valued at no more than $37.
In 2012, when the company first became public, the stock was valued at no more than $3.15, but it was priced at $28.59.
Facebook was private during the recession, going public in 2012 and only catching the tail-end of it.
10. Is the balance sheet strong?
Yes, assets are more than current liabilities.
Assets: 24,188,000
Liabilities: 2,950,000
11. Is the product that’s supposed to enrich the company a major part of the company’s business?
Facebook is all about connecting people all over the world. One of the ways the company does so is through advertising and marketing.
Facebook encourages businesses to create ads on the social media platform for a small fee. Businesses are then able to track how many people reached and how many people saw the ad, enabling businesses to reach a wider audience and thus, improve their business.
Advertising accounted for over 80% of revenue in 2012 and most of 2013.
Facebook is also looking to grow inmobility. One way is by helping developers promote their games across the company’s mobile apps.
12. What is the growth rate? 20-25% is the optimum rate.
Because this is a new company, I looked at the growth rate for the past 12 months.
Revenue growth: 63.10%
Book value growth: 53.00%
The optimum rate is 20-25%, and FB’s growth rate is double that. Yes, fast growth is a good thing, but this can also get companies into trouble if they grow too fast.
13. Is the stock selling at a P/E ratio at or near growth rate?
P/E ratio is at 75.83 as of now
Revenue growth percentage is 63.10%
When a company’s P/E ratio is the same at growth rate, the company is fairly valued according to Peter Lynch.
Ideally, it would be best if the company were growing 75.83% a year with the P/E ratio is 75.83, but that’s not the case.
14. P/E ratio, high or low relative to historical value? The lower the better
The lowest was at 67.71, and highest was at 7930.00.
The current P/E ratio is much closer to its all-time low than it is to the all-time high, which is a good sign.
15. P/E ratio relative to other companies? The lower the better
Twitter’s P/E ratio is at 0, which means Facebook’s is much higher.
16. What is the percentage of institutional ownership? The lower the better
Institutional ownership is at 51%. Twitter’s is at 64%.
17. What is the percentage of insider buys?
Insider ownership percentage is at 0.
Over the past few years, there has only been 1 insider buy.
18. Is the company buying back shares?
Buyback ratio has remained at 0 over the past 4 years, making it lower than 123% than other companies in the same market.
Because the company is currently overvalued, it makes sense for the buyback ratio to be at 0. A company wouldn’t buy back shares when the stock is overvalued because it would completely destroy shareholder value.
Overall score: 3.3/5
I encourage you to use the checklist yourself to rate a company before investing in it. You can do so here.
Take a look at Twitter's analysis.
