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TheStreet Open House

Citigroup (C) Upgrades Facebook (FB) on Solid Mobile Strategy

NEW YORK (TheStreet) -- Recent success with Facebook's (FB) mobile monetization strategy has inspired Citigroup  (C) to upgrade the world's largest social media platform from Neutral to Buy. A Citigroup team, led by head analyst Mark May, said Facebook's mobile strategy represents a genuine sustainable business model. The team raised the price target from $32 to $55, adding that they foresee the Menlo Park, Calif.-based company being included in the S&P 500 by the end of the year.

In pre-market trading, Facebook shares are up 2.97% as of 9:20 a.m. EST. Shares were 0.59% lower to $47.21 at the close of trading yesterday. Overall, Facebook lagged the S&P 500 which was down 0.47%.

Facebook launched a mobile payments feature to its site which will autofill billing information for third-party apps using users' payment data already provided to Facebook. PayPal (EBAY), Braintree and Stripe will act as payment processors during the initial phase of its launch. Purchase data obtained will then feed into Facebook's monetization strategy by allowing for refined targeted advertising.

For its second-quarter ended June 30, Facebook reported 819 million mobile monthly active users, a 51% increase year-over-year. Mobile advertising revenue was around 41% of the total $1.6 billion in advertising revenue for the quarter.

TheStreet Ratings team rates Facebook as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation: "We rate Facebook a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and impressive record of earnings per share growth. However, as a counter to these strengths, we find that the company's return on equity has been disappointing."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Facebook's very impressive revenue growth greatly exceeded the industry average of 22.6%. Since the same quarter one year prior, revenues leaped by 53.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Although Facebook's debt-to-equity ratio of 0.18 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 10.22, which clearly demonstrates the ability to cover short-term cash needs.
  • The gross profit margin for Facebook is currently very high, coming in at 87.04%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 18.36% trails the industry average.
  • Powered by its strong earnings growth of 285.71% and other important driving factors, this stock has surged by 97.42% over the past year, outperforming the rise in the S&P 500 Index during the same period. Setting our sights on the months ahead, however, we feel that the stock's sharp appreciation over the last year has driven it to a price level which is now relatively expensive compared to the rest of its industry. The implication is that its reduced upside potential is not good enough to warrant further investment at this time.
  • When compared to other companies in the Internet Software & Services industry and the overall market, Facebook's return on equity is below that of both the industry average and the S&P 500.

Written by Keris Alison Lahiff.

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