Facebook’s NASDAQ 100 Pursuit Isn’t Over Just Yet
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Earlier this week NASDAQ announced that Facebook Inc. (NASDAQ: FB) did not make the grade for being included in the NASDAQ 100 Index, just yet. The company will be added to the NASDAQ Q-50 Index on September 24. It has also been mentioned that Facebook could be added to the Dow Jones Internet Composite Index very soon.
Although Facebook did not make the cut for the NASDAQ 100, the company was added to the next best thing, the NASDAQ Q-50 Index, which is designed to track the performance of the fifty securities that are next in line to replace the NASDAQ 100 securities. Another hot IPO company that made the Q-50 Index is Groupon Inc (GRPN). Groupon has seen its stock price erode over 80% since it opened over $26 during its November 2011 IPO.
Is the fact that the company is now in the Q-50 Index a buying opportunity, or just another ‘head fake’? It has been said that if the company can get into the NASDAQ 100 Index, it would mean more Facebook shareowners, as ETFs must own the index stocks to maintain their benchmarks.
The fact that Facebook was not immediately welcomed into the NASDAQ 100 might be good news for investors, such as George Soros and tiger cub Chase Coleman and the other thirteen hedge funds that had at least 1% of their 13F portfolios invested in Facebook as of the second quarter. Many companies gaining listing privileges on the NASDAQ 100 have not lived up to expectations, and so has Facebook avoided suicide?
Facebook is up almost 2% on the day. Whether investors like it or not, they will soon have even less of a say as to whether they want to own Facebook. The NASDAQ 100 powers the PowerShares QQQ Trust, Series 1 (ETF) (QQQ), and is a notable part of many ETFs and mutual funds. Notable recent additions to the NASDAQ 100 have been Kraft Foods Inc. (NASDAQ: KRFT), added in June, and Texas Instruments Incorporated (NASDAQ:TXN), added in April. Since their additions, Kraft’s stock is even at a 0% and Texas Instruments is down 12%. On the other hand, Viacom (NASDAQ: VIAB) joined the NASDAQ 100 in May and is up almost 7%.
In thinking about how a listing on the NASDAQ 100 has impacted companies in the past we considered how Kraft, Texas Instruments and Viacom have performed beyond just share price since being listed. Kraft, although basically at 0% on share performance since being added, is expected to post 3Q earnings up 5% from the same quarter last year. The company also trades at a trailing P/E of 21, versus a forward P/E of 16. Kraft has spun off its North American grocery business during this time as well.
Texas Instruments beat EPS estimates by 7% since being added and currently trades at a 21 trailing P/E and 14 forward P/E. The company also guided down EPS estimates for both 2Q and 3Q since being listed, and analyst estimate the company to post 3Q earnings down 23% from the same quarter last year. Viacom was able to secure a deal with DirecTV since being listed, the company has posted 2Q EPS below estimates, $0.97 versus $0.99 on 14% lower revenue. Since being listed, Viacom’s P/E has come in line with its peers and trades at a 13x.
Although the market cap of Facebook has been more than cut in half since its IPO, this will likely not stop its ultimate addition into the NASDAQ 100. Whether we like the stock as a long-term investment or not, it is likely to see positive feedback once it is ultimately welcomed. Facebook currently trades at a trailing P/E of 75, but the company’s forward P/E is less than half this mark at 35.
Even though the addition of Facebook to the NASDAQ 100 might be inevitable, this can only do so much for a faltering stock. Concerns around Facebook are still robust, with respect to advertising and issues with monetization, especially on mobile. In March 2012, users spent more time using Facebook on their mobile device versus computers. The non-diverse and questionable revenue streams of Facebook place concerns not only on top line growth but EPS growth, with downward revisions for 2012 and 2013 EPS estimates over the last 30 days.
Facebook still remains almost entirely dependent on advertising revenues, representing 85% of total 2011 revenues. Facebook has been afforded great opportunities with its global name recognition, vast user base, high level of user data and information gathering and ability to engage users. However, if the company is still failing with respect to capitalize on the 57% of its user base who are mobile users. Facebook is down over 40% since its IPO.
The other major revenue stream for Facebook is from payments, which is mainly the 30% fee it charges Zynga for sales of game-related virtual goods. Zynga recently lowered its 2012 bookings forecast by 20%, which will likely put downward pressure on this part of Facebook’s revenue stream.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.