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Facebook (FB) Is a Sucker for Punishment (Update 1)

Stocks in this article: FB

This article has been updated to adjust the number of users Instagram had upon Facebook's purchase.

NEW YORK (TheStreet) -- Facebook (FB) investors seem to be relishing how seriously the company is taking its teenage demographic leak, after the company reportedly offered $3 billion for Snapchat.

Snapchat, a transient photo messaging app popular among the elusive teen market, allegedly said no thanks to the offer, according to Wall Street Journal sources.

Wall Street seems to love the drama as shares of the social network climbed 1.5% to $49.43 as of mid-morning.

In its recent third quarter, Facebook said of its 728 million DAUs, use among teenagers had declined. The comment rattled appetite for the stock and led many to fret the social network was losing its trend-setting, disposable-cash-rich, social-media-savvy teenage demographic.

To an outsider, a $3 billion all-cash offer for an app with zero revenue (it is free to download and use) seems a no-brainer. But Snapchat's 23-year-old Evan Spiegel, co-founder and CEO is playing hard to buy, reportedly resisting until at least next year by which time he hopes the company has more users and cause for a higher valuation.

To put things in perspective, Instagram, also popular among teenagers, was purchased by Facebook in April 2012 for $1 billion and had 40 million active users that month thanks to a timely Android release. A Forbes estimation puts Snapchat's total users at 26 million in the U.S.

At the time of publishing, Snapchat had not responded to requests for comment. A Facebook spokesperson said the company would not comment on speculation.

TheStreet Ratings team rates Facebook Inc as a Hold with a ratings score of C-. The team has this to say about their recommendation:

"We rate Facebook Inc (FB) 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:

  • FB's very impressive revenue growth greatly exceeded the industry average of 9.4%. Since the same quarter one year prior, revenues leaped by 59.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • FB's debt-to-equity ratio is very low at 0.04 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 10.37, which clearly demonstrates the ability to cover short-term cash needs.
  • Powered by its strong earnings growth of 950% and other important driving factors, this stock has surged by 132.34% 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 Inc's return on equity is below that of both the industry average and the S&P 500.

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