Posts tagged " social media "

Twitter Inc (TWTR) Extended Graph Analysis

May 30th, 2019 Posted by Extended Analysis No Comment yet

Twitter Inc (TWTR) is one of the most favored social networking services in the world. Founded by Jack Dorsey, Noah Glass, Biz Stone, and Evan Williams in 2006.

TWTR logo

About the Company

 

Company Profile

Twitter is an American online news and social networking service on which users post and interact with messages known as “tweets”. Tweets were originally restricted to 140 characters, but on November 7, 2017, this limit was doubled to 280 for all languages except Chinese, Japanese, and Korean. Wikipedia

Founded on March 21, 2006, at San Francisco, CA. The founders are Jack Dorsey, Noah Glass, Biz Stone, and Evan Williams.

 

Twitter Extended Graph Analysis

 

A) TWITTER CASH FLOW

CASH FLOW

Net cash flow provided by operating activites Net cash used for investing activities Net cash provided by (used for) financing activities Capital expenditures Free cash flows
2014 81,796,000 -1,097,272,000 1,691,722,000 -201,630,000 -119,834,000
2015 383,066,000 -902,421,000 -62,998,000 -347,280,000 36,786,000
2016 763,055,000 -598,008,000 -83,975,000 -218,657,000 544,398,000
2017 831,209,000 -112,932,000 -78,373,000 -160,742,000 670,467,000
2018 1,339,711,000 -2,055,513,000 978,116,000 -483,934,000 855,777,000
TTM 1,448,731,000 -1,767,075,000 978,051,000 -473,869,000 974,862,000

Facts

  • Net cash flow provided by operating activities were $1.34 billion and $1.45 billion in 2018 and the trailing twelve months (TTM), respectively.
  • Net cash used for investing activities was -$2.06 billion and -$1.77 billion in 2018 and the trailing twelve months respectively.
  • The net cash provided by (used for) financing activities were $978 million and $978 million in 2018 and the trailing twelve months respectively.
  • While the capital expenditures were -$484 million and -$474 million in 2018 and the trailing twelve months respectively.
  • On the other hand, the free cash flows were $856 million and $975 million in 2018 and the trailing twelve months respectively.

Explanation

  • The net cash flow had increased by 61 and 8 percent from 2017 to 2018 and the trailing twelve months due to the huge increase in net income at 1216 percent.
  • Net cash used for investing activities increased by 1720 percent from 2017 to 2018 due to the increase in purchases of investment.
  • There was a debt issued of $1.15 billion in 2018 which impacted the net cash provided by (used for) financing activities and shows a positive result.
  • On the other hand, capital expenditures are an investment in properties, plant, and equipment.
  • While free cash flows are increasing year-over-year and show a growth of 112 percent in the last five years.

Interpretation

Free cash flows exclude the non-cash expenses and include expenses from equipment and assets and changes in working capital. The company’s free cash flow was impressive as year-over-year it increases. Moreover, Twitter is liquid and its free cash flows represent 73 percent of the net income.

B) TWITTER BALANCE SHEET

Twitter

2014 2015 2016 2017 2018
Total cash 3,621,878,000 3,495,348,000 3,774,579,000 4,403,102,000 6,209,401,000
Current Assets 4,255,853,000 4,381,792,000 4,652,196,000 5,321,884,000 7,111,036,000
Total assets 5,583,082,000 6,442,439,000 6,870,365,000 7,412,477,000 10,162,572,000
Current liabilities 393,794,000 506,039,000 584,021,000 583,278,000 1,516,311,000
Total liabilities 1,956,679,000 2,074,392,000 2,265,430,000 2,365,259,000 3,356,978,000
Equity 3,646,403,000 4,368,047,000 4,604,935,000 5,047,218,000 6,805,594,000
Retained earnings -1,572,446,000 -2,093,477,000 -2,550,350,000 -2,671,729,000 -1,454,073,000
Total debts 1,376,020,000 1,455,095,000 1,538,967,000 1,627,460,000 2,628,250,000
Working capital 3,862,000,000 3,876,000,000 4,068,000,000 4,739,000,000 5,595,000,000

Facts:

  • Total cash was $6.21 billion in 2018.
  • The current assets were $7.12 billion in 2018.
  • Total assets were $10.16 billion in 2018.
  • Current liabilities were $1.52 billion in 2018.
  • Total liabilities were $3.36 billion in 2018.
  • Total equity was $6.8 billion in 2018.
  • Retained earnings were -$1.45 billion in 2018.
  • Total debts were $2.6 billion in 2018.
  • Working capital was $5.6 billion in 2018.

Explanation

  • Total cash increases year-over-year from 2015 to 2018 and has a growth of 42 percent in five years.
  • Current assets increase year-over-year in the last five years and have a growth of 40 percent.
  • Total assets increase year-over-year in the last five years and have a growth of 45 percent.
  • Current liabilities increase year-over-year in the last five years at a rate of 74 percent.
  • Total liabilities increase year-over-year in the last five years at a rate of 42 percent.
  • Total equity increases year-over-year in the last five years at a rate of 46 percent due to additional paid-in capital.
  • Retained earnings were negative in the last five years due to net income losses from 2014 to 2017. In 2018 and the trailing twelve months net income shows positive results and increase 109 and 10 percent from 2017 to 2018 and the trailing twelve months.
  • Total debts increased 48 percent from 2014 to 2018.
  • Working capital has a growth of 31 percent in five years and increasing year-over-year.

Interpretation

The balance sheet represents the company’s financial status at a certain period of time. Twitter has a strong balance sheet, it has sufficient funds and able to handle its liabilities. In other words, Twitter is liquid.

C) TWITTER FINANCIAL RATIOS

Twitter

2011 2012 2013 2014 2015 2016 2017 2018 TTM
Asset turnover (average) 0.15 0.41 0.32 0.31 0.37 0.38 0.34 0.35 0.34
Return on assets % -22.77 -10.23 -30.75 -12.91 -8.67 -6.86 -1.51 13.72 14.29
Financial leverage (average) 0.00 0.00 1.14 1.54 1.47 1.49 1.47 1.49 1.57
Return on equity % 0.00 0.00 -47.77 -17.57 -13.03 -10.19 -2.24 20.34 21.72
Return on invested capital % 0.00 0.00 -42.82 -13.79 -7.59 -6.19 0.17 15.48 15.92
Interest coverage 0.00 0.00 0.00 0.00 -4.43 -3.41 0.09 4.19 4.19

Facts:

  • The asset turnover (average) was 0.34 ratio in the trailing twelve months.
  • Return on assets was 14.29 percent in the trailing twelve months.
  • Financial leverage (average) was 1.57 ratio in the trailing twelve months.
  • Return on equity was 21.72 percent in the trailing twelve months.
  • While return on invested capital was 15.92 percent in the trailing twelve months.
  • The interest coverage was 4.19 ratio in the trailing twelve months.

Explanation

  • Asset turnover ratio means that each dollar of assets generates an average of $0.34 in the trailing twelve months.
  • Return on assets indicates that for every dollar that was invested in assets produced $0.137 in 2018.
  • Financial leverage indicates that the liabilities are 157 percent of the stockholder’s equity.
  • Return on equity indicates that every dollar of common shareholders equity earned $0.2172 return on their investment in 2018.
  • Return on invested capital indicates that every dollar invested in capital produces a $0.1592 return in 2018.
  • Interest coverage measures the company’s ability to make interest payments on its debt in time. Twitter is able to make 4.19 times more earnings than his current interest payments.

Interpretation

Twitter is liquid and was able to make an acceptable return on investments made.

D) INCOME AND MARKET

Twitter

2014 2015 2016 2017 2018 YTD
Revenue 1,403,002,000 2,218,032,000 2,529,619,000 2,443,299,000 3,042,359,000 3,164,378,000
EBIT -538,866,000 -450,036,000 -367,208,000 38,740,000 453,325,000 472,058,000
Net Income -577,820,000 -521,031,000 -456,873,000 -108,063,000 1,205,596,000 1,335,403,000
Market Capitalization 23,042,000,000 16,062,000,000 11,653,000,000 17,834,000,000 21,965,000,000 30,676,000,000
Intrinsic Value 0 815,729,332 890,352,542 2,026,132,340 2,822,415,366 4,173,150,541

Facts:

  • Revenue was $3.16 billion in the trailing twelve months.
  • While the EBIT was $472 million in the trailing twelve months.
  • And the net income was $1.34 billion in the trailing twelve months.
  • The market capitalization was $30.68 billion in the trailing twelve months.
  • While the intrinsic value was $4.17 billion in the trailing twelve months.

Explanation

  • Revenue increases year-over-year and has a growth of 56 percent in five years.
  • While EBIT shows negative in the first three years and has a growth of 214 percent in five years.
  • Net income shows negative in the first 4 years however managed an increased in 2018 and YTD and has a growth of 143 percent in five years.
  • Moreover, market capitalization was erratic in movement in the last five years and has a growth of 25 percent in five years.
  • However, the intrinsic value is increasing year-over-year in the last four years and has a growth of 80 percent. The market capitalization might be overvalued compared to the intrinsic value.

Interpretation

In the last two years of its operation, the management was able to augment its earnings which shows a positive bottom line and was able to increase its cash and working capital as well. Twitter is profitable.

E) KEY EXECUTIVE COMPENSATION

Twitter

2014 2015 2016 2017 2018
Key Executive Compensation 7,855,088 440,006 9,904,051 15,207,588 39,067,621
Jack Dorsey/ Chief Executive Officer 0 68,506 56,551 0 1
Ned Segal/ Chief Financial Officer 0 0 0 14,299,528 4,963,054
Michael Montano/ Engineering Lead 0 0 0 0 17,984,246
Vijava Gadde/ Chief Legal Officer and Secretary 7,855,088 371,500 9,847,500 908,060 11,799,901
Mathew Derella/ Customers Lead 0 0 0 0 4,320,419

Detailed Distribution

2014 2015 2016 2017 2018
Key Executive Compensation
Salary 283,981 370,000 498,000 665,385 1,822,885
Bonus 300,000 609,210
Annual Other Income
Restricted Stock Award 7,555,950 9,348,000 14,239,203 36,626,526
Securities Option
LTIP Payout
Non-Equity Compensation
Other Compensation 15,157 70,006 58,051 3,000 9,000
Total 7,855,088 440,006 9,904,051 15,207,588 39,067,621
Jack Dorsey/Chief Executive Officer
Salary 1
Bonus
Annual Other Income
Restricted Stock Award
Securities Option
LTIP Payout
Non-Equity Compensation 68,506 56,551
Other Compensation 68,506 56,551 1
Total
Ned Segal/Chief Financial Officer
Salary 165,385 500,000
Bonus 300,000
Annual Other Income
Restricted Stock Award 13,832,643 4,460,054
Securities Option
LTIP Payout
Non-Equity Compensation
Other Compensation 1,500 3,000
Total 14,299,528 4,963,054
Michael Montano/ Engineering Lead
Salary 325,769
Bonus 45,500
Annual Other Income
Restricted Stock Award 17,612,977
Securities Option
LTIP Payout
Non-Equity Compensation
Other Compensation
Total 17,984,246
Vijaya Gadde/ Chief Legal Officer
Salary 283,981 370,000 498,000 500,000 498,077
Bonus
Annual Other Income
Restricted Stock Award 7,555,950 9,348,000 406,560 11,298,824
Securities Option
LTIP Payout
Non-Equity Compensation
Other Compensation 15,157 1,500 1,500 1,500 3,000
Total 7,855,088 371,500 9,847,500 908,060 11,799,901
Matthew Derella/Customers Lead
Salary 499,038
Bonus 563,710
Annual Other Income
Restricted Stock Award 3,254,671
Securities Option
LTIP Payout
Non-Equity Compensation
Other Compensation 3,000
Total 4,320,419

Facts

  • Total key executive compensation was $39,067,621 in 2018.
  • And the chief executive officer, Jack Dorsey compensation was $1 in 2018.
  • While the chief financial officer, Ned Segal compensation was $4,963,054 in 2018.
  • On the other hand, Engineering Lead, Michael Montano compensation was $17,984,246 in 2018.
  • In addition, the Chief Legal Officer and Secretary, Vijava Gadde compensation was $11,799,901 in 2018.
  • Customers Lead, Matthew Derella compensation was $4,320,419 in 2018.

Explanation

  • The total key executive compensation represents 1.81 percent of the gross profit.
  • Ned Segal, CFO total salary represent 10 percent of his total compensation.
  • Michael Montano, Engg Lead total salary represents 2 percent of his total compensation.
  • Vijava Gadde, CLO and Secretary total salary represent 4 percent of his total compensation.
  • Matthew Derella, Customer Lead total salary represent 12 percent of his total compensation.

Interpretation

The total key executive compensation shows an increase of 110.53 percent from that of last year.

F) LOBBYING AND CONTRIBUTIONS

Twitter

LOBBYING/CONTRIBUTIONS TO POLITICIANS

2013 2014 2015 2016 2017 2018 2019
$90,000.00 $310,000.00 $500,000.00 $680,000.00 $550,000.00 $1,100,000.00 $420,000.00

TOTAL CONTRIBUTIONS

Cycle Total Democrats Republicans % to Dems % to Repubs Individuals PACs Soft (Indivs) Soft (Orgs)
2018 $288,284.00 $278,211.00 $9,150.00 97.00% 3.00% $269,558.00 $10,700.00 $250.00 $0.00
2016 $858,021.00 $589,276.00 $263,945.00 69.00% 31.00% $840,021.00 $15,500.00 $2,250.00 $0.00
2014 $41,300.00 $23,300.00 $3,000.00 56.00% 7.00% $26,300.00 $0.00 $15,000.00 $0.00
2012 $35,529.00 $34,279.00 $250.00 97.00% 1.00% $34,529.00 $0.00 $0.00 $0.00
2008 $3,000.00 $3,000.00 $0.00 100.00% 0.00% $3,000.00 $0.00 $0.00 $0.00
$1,226,134.00 $928,066.00 $276,345.00 76.00% 23.00% $1,173,408.00 $26,200.00 $17,500.00 $0.00

Itemized Lobbying Expenses for Twitter, 2019

Firms Hired Total Reported by Filer Reported Contract Expenses (Included in Total Reported by Filer)
Twitter $420,000.00
Mehlman, Castagnetti, et al $60,000.00
Integrated Solutions Group $30,000.00
Joseph Group $30,000.00
Total $120,000.00

A lobbyist representing Twitter, 2019

Lobbying Firm Hired Amount Subsidiary (Lobbied For) Lobbyist
Integrated Solutions Group $30,000.00 Twitter Boyd, Moses
O’Hanlon, G John
Joseph Group $30,000.00 Twitter Joseph, Kevin
Mehlman, Gastanetti, et al $60,000.00 Twitter Aronson, Lauren
Castagnetti, David
Collins, Mike
Distefano, Nichole
Eastman, Sage
Haro, Steven
Hingson, Dean Constantine
Mehlman, Bruce P
Pickering, Elise Finley
Robinson, Michael C
Rosen, Dean
Thomas, David R
Tolar, Helen
Wooters, Charles
Twitter $420,000.00 Twitter Culbertson, Lauren
Kane, Kevin
Roman, Lisa

Facts:

  • Total lobbying expenses in 2013 was $90,000.00.
  • Total lobbying expenses in 2014 was $310,000.00.
  • The lobbying expenses in 2015 was $500,000.00.
  • While lobbying expenses in 2016 was $680,000.00.
  • Lobbying expenses in 2017 was $550,000.00.
  • On the other hand, in 2018 the total lobbying expenses was $1,100,000,00.
  • And the total lobbying expenses in 2019 was $420,000.00.

Explanation

A special interest’s lobbying activity may go up or down over time, depending on how much attention the federal government is giving their issues. Particularly active clients often retain multiple lobbying firms, each with a team of lobbyists, to press their case for them.

Total Lobbying Expenditures: $420,000

Source: OpenSecrets.org

Center for Responsive Politics

Interpretation

Twitter is incurring a lobbying and contributions expenses to politicians every year since 2013 to the present time. These expenses are not reflected in the financial statements of the company although they were actually incurred.

G) FINANCIAL STRENGTH

Twitter

DATA

Working capital Total assets Sales EBIT Market value of equity Book value of total liabilities Retained earnings
5,595,000,000 10,162,572,000 3,164,378,000 472,058,000 28,585,400,000 3,356,978,000 -1,454,073,000

FORMULA

Z-Score =  1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Calculation Ratio Z-Score Result
A – Working Capital / Total Assets 0.55 1.2 0.66
B – Retained Earnings / Total Assets -0.14 1.4 -0.196
C – EBIT / Total Assets 0.05 3.3 0.165
D – Market Value of Equity / Book Value of Total Liabilities 8.52 0.6 5.112
E – Sales / Total Assets 0.31 1.0 0.31
Z-Score 6.051

The Z-Score formula is computed as follows: Z-Score =  1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Facts

  • A – 0.55 * 1.2 = 0.66
  • B – -0.14 * 1.4 = -0.196
  • C – 0.05 * 3.3 = 0.165
  • D – 8.52 * 0.6 = 5.112
  • E – 0.31 * 1.0 = 0.31   
  • Z-Score = 6.051

Explanation

  • The Z-Score by Dr. Edward Altman is a significant measure in determining the financial strength of the company because it relies on different weighted financial liquidity and profitability metrics to come up with the overall score. It indicates the company’s probability of bankruptcy.

Interpretation

The Z-Score of Twitter was 6.051, it is then compared to the grading scale. According to Altman, an overall score of 3 and above will not declare bankruptcy. Twitter is not close to solvency. The company is in good financial health.  

CONCLUSION

Twitter company’s balance sheet is in good health and financially stable. The company is liquid and profitable. The management was able to augment its earnings every year which produced good financial results.

The company’s stock price was erratic in movement so as the market capitalization in the last ten years. The book value is increasing every year in the past six years. The shares of stocks were increasing as well. I recommend the stock of Twitter Inc (TWTR) a Buy.

 

CITATION

https://www.morningstar.com/stocks/XNYS/TWTR/quote.html

https://www.opensecrets.org/orgs/lobby.php?id=D000067113

Researched and written by Criselda

Twitter: criseldarome

 

 

 

We Think Facebook is Worth $94

September 15th, 2014 Posted by Company Research Report No Comment yet

Facebook, Inc (FB) is an American online social media and social networking service company. It is based in Menlo Park, California. It was founded by Mark Zuckerberg, along with fellow Harvard College students and roommates Eduardo SaverinAndrew McCollumDustin Moskovitz, and Chris Hughes

Company Research  

Facebook Inc.

Nature of Business  

Mark Zuckerberg founded Facebook Inc., while he was studying psychology at Harvard University. He was a keen computer programmer who had developed a number of social-networking websites such as “Coursematch” and “Facemash.”

In February 2004 Mr. Zuckerberg launched “The Facebook” or Facebook, Inc., it engaged in building products to create a utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about.

Developers use the Facebook Platform to build applications and Websites that integrate with Facebook to reach its global network of users and to build personalized and social products.   The site’s features have continued to develop during 2007. Users can now give gifts to friends, post free classified advertisements and even develop their own applications – graffiti and Scrabble are particularly popular. Currently, the company continues to grow and give people the power to share and make the world more open and connected.

How do they make money? 

Facebook Inc., generate substantially all of their revenue from advertising and from fees associated with their payments infrastructure that enables users to purchase virtual and digital goods from its company’s developers with applications on the Facebook website.

Advertising revenue is generated by displaying ad products on Facebook properties, including company’s mobile applications and third-party affiliated websites or mobile applications. Marketers pay for ad products either directly or through their relationships with advertising agencies, based on the number of clicks made by users, the number of actions taken by users, or the number of impressions delivered.

Facebook, recognize revenue from the delivery of click-based ads in the period in which a user clicks on the content and action-based ads in the period in which a user takes the action the marketer contracted. They recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to users.

FB also generates its income from payment and other fees from its users when they purchase virtual and digital goods from its developers with an application on the company’s websites.  Users can transact and make payments on the Facebook website by using debit and credit cards, PayPal, mobile phone payments, gift cards or other methods. The company will then receive a fee from developers when users make purchases in these applications using its Payments infrastructure.

FB recognizes revenue, net of amounts remitted to their developers. They have mandated the use of their payments infrastructure for game applications on Facebook, and fees related to payments are generated almost exclusively from games. Facebook, Inc other fee revenue, which has not been significant in recent periods, consists primarily of user-paid services and its ad serving and measurement products.

Who is running the business and what is their background?

Facebook Inc.

Mr. Mark Zuckerberg is the Founder of Facebook, Inc., and has been its Chief Executive Officer since July 2004. He is responsible for setting the overall direction and product strategy of Facebook. He leads the design of Facebook’s service and development of its core technology and infrastructure. Mr. Zuckerberg has been the Chairman and Director of Facebook Inc., since January 2012 and July 2004 respectively. He serves as a Member of the Investment Committee at FB Fund, L.P. Mr. Zuckerberg attended Harvard University, where he studied computer science.

Facebook Inc.

Mr. David M. Wernher serves as Chief Financial Officer, Vice President – Corporate Finance and Business Planning of Facebook Inc, effective June 1, 2014. Mr. Wehner has served as Facebook’s Vice President, Corporate Finance, and Business Planning since November 2012. From August 2010 through November 2012, He also serves as Chief Financial Officer of Zynga Inc. From February 2001 to July 2010, Mr. Wehner was employed at Allen & Company, an investment bank focused on media and technology where he served as a Managing Director from November 2006 to July 2010, and a director from December 2005 to November 2006.  He also served as an Analyst at JP Morgan Chase & Co, Research Division.

In his career, he worked as a Consultant with the global strategy consulting firm Monitor Company, where he advised clients in a range of industries both in the United States and Asia. Mr. Wehner joined the New York investment banking firm Allen & Company, LLC in 2001, where his responsibilities include principal investing, corporate finance and mergers & acquisitions advisory.  Mr. Wehner holds a B.S. in Chemistry from Georgetown University, and an M.S. in Applied Physics from Stanford University, where he was a National Science Foundation fellow.  

Do you trust these people and are they competent? 

Facebook Inc., hires and retain people who can contribute to developing its strategy, quickly innovate and build new products. CEO and CFO of the company are highly talented and able to show its competency, as well as demonstrated strong leadership. Therefore, my confidence and trust are absolutely positive as they both shows good management capabilities.

Value Investing

If you want to invest in a company, you need to know not only the nature of business, background and the people behind the success of the firm but most of all to know the financial standing of the company. And this could be found on the balance sheet, income statement and cash flow statement for the given period.

Balance Sheet

Financial Liquidity

Shown in the table below would determine how liquid the company Facebook is through calculations of data from 2010 to 2013.

Facebook inc.

Current ratio average in the past four years from 2010 to 2013 was 8.37, with the latest quarter of 12.81 times. This is the very high current ratio, while the quick ratio average was also 8.06 and the latest quarter was 12.48, which means the company has very high current resources. Looking at its details, cash is the number one contributor of this very high current ratio and quick ratio, which is 60, 62, 64 and 64 percent of total assets.

Their debt to equity ratio is minimal at an average of 0.13 while the solvency ratio is 86 percent average.

By looking at the above data, Facebook is financially healthy and stable. They are very liquid with high current resources. Their debt to equity is only 13 percent and the solvency ratio of 86 percent so above the general rule of thumb which is 20 percent.

Efficiency

The table below is the efficiency ratios of Facebook Inc., wherein it is used to analyze how well a company uses its assets and liabilities internally. Efficiency ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general use of inventory and machinery.

Facebook Inc.

Accounts receivable turnover can be used to determine whether the company is having trouble collecting on sales where they provide customers on credit. Facebook Inc., shows an increasing trend from 2010 to 2013 with TTM of 10.19 times which is a good sign. Converting this into Days sales outstanding which are computed as 365 days over accounts receivable turnover. The result is amazing with the declining trend from 69 days to 42 days and TTM of 36 days.

Days payable or payables period shows likewise a declining trend with TTM of 19 days. This means Facebook pays their payables in the short term within 22 to 15 days.

Fixed asset turnover measures the company’s effectiveness in generating sales from its investments in plant, property, and equipment. It has an up and down trend with a TTM of 3.39 times or 108 days.

Asset turnover measures the ability of a company to use its assets to efficiently generate sales. Facebook asset turnover has been slightly up in 2011 and down in 2012 and 2013 with a TTM of 0.55 times or 664 days. This means they don’t usually generate sales from their total asset.

Their cash conversion cycle (CCC) measures how long they will be deprived of cash if it increases its investment in resources in order to expand customer sales. This show that Facebook has a declining cash conversion cycle from 2010 to 2013 with a TTM of 16.8 days.

Efficiency ratios are important because an improvement in the ratios usually translates to improved profitability. Knowing its cash conversion cycle so they can utilize well their cash from sales more efficiently in more investments as well as its asset base – efficiently to generate sales and that is a very good thing.

Income Statement

Revenue is the amount of money that is brought into a company by its business activity. It is the “top line” or “gross income” figure from which costs are subtracted to determine net income.

The table below shows the detailed income of Facebook from 2010 to 2013 and the latest five quarters:

Facebook Inc.

Facebook Inc.

As observed in the above table the trend of revenue and gross income per annual data was yearly increasing which means it is getting higher and higher year after year. While the operation and net income of Facebook have a similar trend which declined in 2012 by 69 and 95 percent respectively.

Meanwhile, quarterly data shows that revenue, gross profit, and operating income were consistently going up in the first three-quarters, but slightly down in quarter 2014-03 however, it recovered in the quarter ending June 2014. Net income shows getting higher and higher every quarter.

Margin

It refers to the percentage results of gross income, operating income and net income over total revenue.

Facebook Inc.

Annual data showed that Facebook Inc., average gross margin was 77 percent, operating margin 37 percent and net margin was 19 percent. However, quarterly data shows the net margin of the company was getting higher and higher every quarter from 2013-06 to 2014-06 with the following percentage:  18, 21, 20, 26 and 27.  This means a good profitability for the company recovering after the 2012 crisis.

Dupont Analysis

It is an expression which breaks return on equity (ROE) into three parts. And this tells us how much profit the company generated for each dollar of total assets. Return on equity using the DuPont Method as computed by a Net profit margin x Asset turnover x Equity multiplier.

Facebook Inc., has the following data in TTM: Net profit margin = 24; Asset turnover = 0.55 and Equity multiplier = 1.13. Therefore, ROE equals 15 percent; which Facebook Inc., could return such profit for every dollar of equity. This is the portion of the return on equity earned on the debt at work in the business.

Cash Flow Statement

FB cash flow data from 2010 to 2013 are shown per the table below:

Facebook Inc.

Operating activities are transactions which include the cash inflows associated with sales interest and dividend revenues and cash outflows associated with operating expenses, interest and taxes. FB’s operating cash flow from 2010 to 2013 was positive and increasing yearly. It shows that the company is doing good and continue progressing. It has an average of $2,578M.

The company’s investing cash flow shows a negative balance from 2010 to 2013, with an average of $-3,418M. It indicates that cash outflows are greater than inflows on this category. The company was expanding through the purchase of investments yearly.

And financing cash flow, the balance were positive except in 2012 which is -667. Through looking back at its details the company retired the debt of $1,891M in 2012, so cash outflow exceeds cash inflow.

Free Cash flow

It is the cash left over after deducting capital expenditures from the operating cash flow.

The table below shows the free cash flow balance of Facebook from 2010 to 2013.

FB 9

FB’s free cash flow shows a positive balance, with an average of 1,559 and trailing twelve months of $3,208 from 2010 to 2013 operation.  It shows that the company is capable of expanding its business wider.

Valuation

In this investment valuation, the company’s historical financial records such as the balance sheet, income statement and cash flow statement are our basis aside from the key ratios. It is Totem’s philosophy to buy wisely when prices are down and to sell when prices rise a great deal. And doing this valuation is the heart of any investment decision.

Totem Investment uses this method. The financial calculator is our main instrument in computing the equity selection. The result data as seen below:

Growth    47%

Yield        0 %

Value of Appreciation                $   94.29

Value of Dividend                                 0

Total Value                                 $  94.29

Price investor is willing to pay    $363.52

Facebook Inc., has a company growth of 47% as a computed base from their book value. They had an average P/E ratio of 50 and a dividend yield of 0%. In computing the value appreciation it is the average ROE with the return of book value, price, and the average P/E all in 5 years. Therefore, the result of the present value after the margin of safety of 40% equals $94.29. And the value dividend is $0 resulted from dividend divided by interest rate of 15%, which is constant.So, the total of the two value appreciation and value dividend equals $94.29 as their total value. Comparing the total value of $94.29 with the current price per share of $77.43 dated September 10, 2014. This means the company stock is trading at an undervalued price of 17.9%. But the price investor is willing to pay amounting $363.52 as computed by multiplying historical P/E with expected earnings for five years.

Aside from these let us compare market values of the stock with the fundamentals, their earnings, book value, growth multiples and other metrics as shown in the table below:

FB 10

The book value per share showed an increasing trend of 129, 396, and 507 percent from 2009 to 2013 with TTM of $7.06 and an average of $3.58 per share. This is used to calculate the per share value of a company based on its equity available to common shareholders and just one of the methods for comparison in valuing of a company.

Its historical price to earnings has trended up and down ratio of 1666.7and 92.6 percent from 2012 to 2013 with TTM of 84 and an average of 879. P/E ratio is an equity valuation multiple. It is defined as market price per share divided by annual earnings per share.

Earnings per share have a growth ratio of – 0.98 and 0.59 with an average of 0.35 and TTM of 0.92 per share. It is the monetary value of earnings per each outstanding share of a company’s common stock.

Their return on equity (ROE) showed an up and down trend of -0.05, -0.98, and 2638 percent with an average of $14.75 and TTM of 15.44. ROE measures the rate of return on the ownership interest (shareholders’ equity) of the common stock owners. It is a gauge of a firm’s efficiency at generating profits from every unit of shareholders’ equity (also known as net assets or assets minus liabilities). This shows how well a company uses investment funds to generate earnings growth. ROE’s between 15% and 20% are generally considered good.

Conclusion

Totem Investment is looking for companies with a strong balance sheet or those with little debt, above average profit margin and ample of cash flow. So, as undervalued whose stock price is temporarily down, but whose fundamentals are sound in the long run.Facebook Inc., passed these criteria. Current market price is down at $77.48 per share dated September 12, 2014. So, compared to its total value of $94.29,  the company is undervalued and still merits a buy.

CITATIONS:

https://www.google.com/finance?q=FB&ei=OMv2U7DyKO_SigL7w4HACw  

http://www.reuters.com/finance/stocks/officerProfile?symbol=FB.O&officerId=2502019  

http://www.sec.gov/Archives/edgar/data/1326801/000132680114000032/fb-6302014x10q.htm   

Researched and Written by Nelly, Rio, and Meriam

Edited by Cris

Note:

Research Reports can be found under the company tab.