Facebook (FB) Stock Woes: How the Company Stacks Up to Apple, Google, and Microsoft

Facebook (FB) continues to putter along. The stock price, currently $22/share, is down over 31 percent from the IPO offering price. In recent days, the stock has rallied somewhat.

A few days ago, Mark Zuckerberg, FB Chief Executive Officer, conducted a press conference attempting to allay the concerns of the investment community about the faltering stock price. The issues on the minds of most analysts were: the sustainability of the company's current advertising business model and the synergies between FB and mobile devices. Zuckerberg offered very few details, but did suggest that he is on the case and not to underestimate the company's future potential.

As a communication company, most analysts expected the CEO to be much more communicative with his stakeholders. His attitude towards the investment community is puzzling and certainly has been a depressant on the stock price.

Expectations for FB equaled those for Apple, Google, and Microsoft when they debuted. So, it would be interesting to consider whether FB can in fact live up to all the hype by comparing the businesses and the financials of all four companies.

The first thing that jumps out is that FB has created a network of almost one billion users, but they do not pay anything to the company and do not impact revenues directly. The business model, simply stated, is to post advertising on devices used to connect to the FB network. Advertisers are the principal source of revenues for the company. A billion users are a tempting source of new business for most advertisers.

With this in mind, Apple and Microsoft are not compatible from a business perspective. Each of them manufactures products that are sold to a huge customer base. Nevertheless, they are considered "high tech" companies, as is FB, and the continued development of communication and media products and applications are critical to their future performance.

The best comparison is with Google. Its major source of revenues comes from the sale of advertising, similar to FB. The difference between FB and Google customers is that they sign on for different purposes. FB users are looking to connect to others, while Google users are looking to buy something or obtain information. Many analysts are concerned that FB users may not be as inclined to click on to advertising and buy products as the Google users.

The chart below was constructed using information from the Yahoo! Finance site.

 Facebook

      Apple

    Google

 Microsoft

Market capitalization (billion $)

 4

627

225

258

Price/earnings multiple

72.43

15.74

20.48

15.39

Operating margin (percent)

13.84

35.62

30.76

37.92

Revenue (billion $)

4.33

148

43

73

Earnings before Interest and Taxes (billion $)

1.05

55.82

15.45

30.71

Earnings per share

0.29

42.55

33.73

2.00

Cash on hand (billion $)

10.19

27.65

41.72

62.04

Cash flow (billion $)

1.76

52.15

15.82

31.63 

Financially, a comparison to Apple, Google, and Microsoft is somewhat remote. FB's market capitalization is dwarfed by the others, and its first few months as a public company have been less than stellar. The investment community still has faith in FB, as it continues to benefit by a very substantial 72 price/earnings ratio, far greater than the other companies. Investors still believe FB will have explosive growth after it effectively monetizes its business and will grow into the p/e ratio.

Although FB's revenues are miniscule compared to the others, analysts believe they will increase rapidly. In the same vein, expenses and costs are ahead of revenue growth so that operating margins are far lower than the comparison companies at this point in time. FB, like Apple, Google, and Microsoft, has tremendous operating leverage. This results when revenues are turbo charged by one-time research and development expenditures. Eventually, expenditures decline while revenues skyrocket.

Fortunately for FB, it has not incurred significant debt, so that cash flow can be dedicated to product development. However, the lion's share of its IPO was used to buy out early stakeholders and employee shares, and not applied to infrastructure enhancements.

FB has a long road to travel before it can truly be compared to Apple, Google, and Microsoft. The pace at which it developed to this point is impressive. But, its initial foray into the stock market will leave a bad taste in the mouths of investors for many years. The most important thing FB must do is improve its communication with the investment community.