The article was written by Jacob Saphir, a Financial Analyst at I Know First.

Bullish Facebook Stock Forecast

“The biggest risk is not taking any risk… in a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” Mark Zuckerberg

Summary:

Improving Fundamentals

Increasing Importance In Mobile Advertising

High Piotroski Score

I Know First Algorithm Bullish Forecast

Background:

From the dormitories of Harvard University, CEO Mark Zuckerberg revolutionized the way we communicate and share information. Before the company’s founding in 2004, Myspace and Friendster were the social media platforms of choice. However, Mark’s vision took social media and paved the way to a multi-billion dollar market. It is estimated that approx. 1/6 people in the world has a Facebook account. Facebook has become one of the most recognized brand in the world. With such a large population, the data and traffic is a haven for business and advertisers. Facebook’s fundamentals are improving, mobile advertising is becoming more important, and the Piotroski scores Facebook favorably.

(Source: Facebook, Statista 2016)

Improving Fundamental:

Net income has been rising each quarter. Net income improved drastically from posting $1,510 million in the first quarter of 2016 to posting net income of $4,273 at the end of the fourth quarter. Perhaps, one of the biggest reasons for its rise contributes to a reduction of cost of goods sold. Since December 2015, we have seen costs of goods sold decrease each quarter from posting $7,443 million to $3,411 million. That is more than a 50% reduction in expense. Moreover, operating cash flow has a steady positive trend. If we were to look back from the year 2012 to the most recent year of 2016, net cash provided by operating cash flow has increased from $1,612 million to $16,108 million. That means the average past 5 year growth rate has been nearly 200%. Facebook’s rise in net income has also been a result in increasing net revenue due to mobile advertising.

Growth in Mobile Advertising

Mobile advertising has been experiencing one of the highest growth rate in revenue for the company. As phones become more accessible to the public and the amount of information shared at its convenience, businesses view such source of information as vital. Facebook’s average revenue per user increased by 34% to $15.98 compared to last year. Mobile advertisement now accounts for over 80% of the company’s total advertising revenue. In addition, advertising revenue increased by 57% from last year to $26,885 million from $17,079 million. Such an increase in revenue, could have a favorable result from the Piotroski score.

Piotroski Score

In a previous I Know First article, the Piotroski score was among the stock screening tools used by investors to meet their criteria. Stanford professor Accountant, Joseph Piotroski, developed a scoring system to rate stocks based on fundamental analysis. The Piotroski score compares and computes key ratios and gives a score. With a high enough score, the stock could be considered a potential investment. As we can see below, Facebook has scored considerably high from of a possible 9 points to be a potential investment.

Profitability

Positive Return on Asset (ROA) of 17.82%. (1 point)

Positive Operating Cashflow for the year 2016 of $16,108 million. (1 point)

Higher ROA than the previous year: 17.82% compared to 8.19%. (1 Point)

Operating Cashflow/Total Assets is higher than ROA: 32.6% compared to 17.82%. (1 Point)

Leverage and Liquidity

Long term debt ratio is lower than previous: No change according Facebook’s 2016 annual report. (N/A)

Higher current ratio compared to last year 11.97 compared to 11.25. ( 1 Point)

No new shares were issued (1 Point)

Operating Efficiency

Higher gross margin of 86.3% compared to lat year’s 84% (1 Point)

Higher asset turnover ratio .48 compared to last year .40 (1 Point)

I Know First Bullish Forecast

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.