Why Facebook (FB) is Up Today

NEW YORK (TheStreet) -- Facebook (FB) shares are up 3.8% on the news that it will soon join the S&P 500.

The social networking company will replace Teradyne (TER) on the S&P 500 after the end of the trading day on Dec. 20. Facebook will also join the S&P 100, replacing The Williams Company (WMB), S&P Dow Jones indices said.

News of joining the S&P 500 followed an announcement from Facebook-owned Instagram that will help it compete against popular mobile messaging apps.

The new Instagram Direct feature lets users privately share photos with up to 15 friends on their iPhone or Android smartphone. The feature is meant to compete with Snapchat, a messaging service that lets users share photos and videos that disappear after a short period of time. Before announcing the feature, Facebook reportedly tried to buy the privately-owned Snapchat for $3 billion.

Instagram Direct will also compete with Twitter's (TWTR) new feature that adds the ability to share photos privately in direct messages. Both services are attempts to keep users, specifically teens, on the respective social networks before they switch to other services.

TheStreet Ratings team rates FACEBOOK INC as a Hold with a ratings score of C-. TheStreet Ratings 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 9.1%. 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.
  • Although FB's debt-to-equity ratio of 0.04 is very low, it is currently higher than that of the industry average. 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 950.00% and other important driving factors, this stock has surged by 74.44% 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.