Facebook Inc (NASDAQ:FB) had a rather bumpy annual meeting this week.
What was most amazing about the meeting wasn’t that it was about the stock price – still stuck below the $38 IPO price – or the frankly silly questions asked by shareholders who appear not to understand the nature of what they’ve bought.
What was most amazing were the answers, a collection of mishmash and buzzwords indicating even Facebook Inc (NASDAQ:FB) management doesn’t know what they are, or even what they want to be.
What Facebook is
Facebook Inc (NASDAQ:FB) is, essentially, a cloud applications shop. Its basic application is its directory, just as Google Inc (NASDAQ:GOOG)‘s basic application is search.
The company has been investing heavily in infrastructure, and in programming, but what it has mainly done with all this is simply enhance the base service, or try to extend it into other platforms like mobile.
Meanwhile some of its key attributes, like its game platform, remain unexplained and unexploited.
At his first annual meeting as CEO, Zuckerberg was tongue-tied trying to explain how all this fits together, and somewhat put-off by the technical naivete of questioners who had put their money into his company. That’s OK. But the fact that COO Sherry Sandberg, a more experienced executive, couldn’t or didn’t save him should have troubled investors both inside and outside the company.
It might be a good time to look at the numbers and see if tech investors can find a better horse to ride.
Facebook by the numbers
Facebook Inc (NASDAQ:FB) has now gone through four quarters as a public company, so it’s fair to see how it stacks up.
Over the last two quarters we are starting to see what we have. Facebook Inc (NASDAQ:FB) brought in about $3 billion in revenue over the last two quarters, with its operating margin averaging 30%. The seasonality seen at so many consumer stocks isn’t evident here, with sales for the March quarter coming in just short of those for the December quarter.
During those two quarters of “normalcy” Facebook has earned $283 million. Take that across a full year and you get earnings of about $550 million. Taken against a market cap of $58 billion, that still leaves you with a Price/Earnings (P/E) multiple of about 120, which isn’t too bad when compared with Amazon.com, Inc. (NASDAQ:AMZN), the company that Zuckerberg apparently takes as his exemplar.
The balance sheet shows that, if anything, Zuckerberg is pushing his company harder than even Bezos. In order to keep buying cloud infrastructure, the company has taken on $2.26 billion in debt, $1.92 billion of it long-term debt. While it has plenty of short-term investments in the bank to pay off this debt four times, it’s still an indication of how fast Zuckerberg wants his company to go.
In order to make the balance sheet and income statement look as good as they appear to, however, Zuckerberg has been sacrificing on cash flow. On a cash flow basis, the company actually dropped $59 billion last quarter, after generating $1.7 billion in cash during the last two quarters of 2012.
Yahoo!: A better place
Yahoo! Inc. (NASDAQ:YHOO) may actually be a better place for you to invest right now.
Despite rising nearly 70% in the last year, Yahoo! Inc. (NASDAQ:YHOO) is still worth just half what Facebook is, meaning positive financial results will deliver a bigger hit to shareholders than they will at Facebook. Yahoo!’s revenue numbers are about one-fourth less than those of Facebook, and its profit margin for the last quarter was also half that of Facebook.
So why am I recommending Yahoo!?
For two reasons. First, Yahoo! has assets Facebook can’t dream of having, namely its remaining stake in Alibaba and Yahoo! Japan, which continue to power the stock despite a lack – so far – of organic growth under new CEO Marissa Mayer. Second, Yahoo! remains debt-free, and manages asset values conservatively. Like Facebook, Yahoo! was cash-flow negative in the last quarter, but that was mainly due to investing and financing activities. On an operating basis the direction is positive.
But the most important reason to buy Yahoo!, and not Facebook, is that Yahoo! appears to know what it is, and what it wants to be. It’s a cloud-based data applications company. The company’s acquisition strategy has been coherent, its goals clearly articulated. Its relationship with Apple Inc. (NASDAQ:AAPL) is not antagonistic, and its skills complementary. It’s simply, in my view, a more grown-up company run by grown-up executives.
And here’s the key Facebook metric you need to know. The average age of a Facebook user is now 41, the average age of a Facebook employee is 31. Yahoo! is much closer in these areas. When you’re consonant with your user base, when you understand your strengths and know your strategic direction, you’re likely to be a better investment.
Dana Blankenhorn owns shares of Yahoo!. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook.
The article Until Facebook Can Explain What It Is, Avoid It originally appeared on Fool.com and is written by Dana Blankenhorn.
Dana is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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