Why Facebook (FB) Dropped Today

NEW YORK (TheStreet) -- Facebook (FB) shares slid on Monday as investors continued to digest news following the social network's third-quarter earnings last Wednesday.

Investors continued to show concern teenagers were shunning the service in preference for alternative social networks. CFO David Ebersman noted during a conference call that teenagers using the service on a daily basis had decreased over the quarter. However, he said Facebook remains fully penetrated among the teen demographic and overall engagement remains strong. 

Also a factor, management said the number of ads in news feeds has leveled off with advertising saturation to remain at current levels.

"We do not expect to significantly increase ads as a percentage of news feed stories beyond where we were at the end of Q3," said Ebersman. "Increasing ads in news feed has been a meaningful driver of our revenue growth in 2013, so this should be factored into your expectations for next year."

Shares had dropped 3.3% to $48.11 by market close. Despite rocky trading sessions over the past few days, shares of the social networking giant are up 80.7% in the year to date.

TheStreet Ratings team rates Facebook Inc as a Hold with a ratings score of C-. The team has this to say about its 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 137.82% 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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