Facebook ... Where Did My Money Go?

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Reporting periods are exciting times for most investors. How did my stocks do? Did they beat or miss earnings? Are prices up or down? Should I sell my shares or buy more shares?

What is an investor to do after the adrenalin rush of reporting season is over? I find this a great time to take a step back and ask the following question ... 

Where did my money go?

Today, I am taking a look at Facebook (NASDAQ: FB). For this exercise I need the latest income statements from their 10Q and 10K  filings. Let’s also suppose that I just spent $50 buying “stuff.” To determine how Facebook used my money I will divide each sub-category on the income statement by revenue. Using the latest 10Q, this exercise looks like this:

Cost of Revenue ($413 million) / Revenue ($1.458 billion) = .28326 x $50 = $14.16. So, Facebook used $14.16 out my purchase to buy the “stuff” that they sold me. Easy enough? Let’s look at the rest of the sub-categories. 

Cost of Revenue: $14.16 (28.326%)

Research and Development: $10.05 (20.096%)

Marketing and Sales: $6.96 (13.923%)

General and Administrative: $6.04 (12.071%)

Interest Expense: $0.51 (1.029%)

Other Expense: $0.17 (0.343%)

Income Taxes: $4.60 (9.191%)

Net Income: $7.51 (15.021%)

For their latest quarter, Facebook has done a pretty good job of controlling expenses and dropping 15.021% of every revenue dollar to their bottom line. By itself, one quarter does not tell us much however, so let’s turn to their latest 10K report and see what management has been able to do over the last three years.

<table> <tbody> <tr> <td>Facebook</td> <td>2010</td> <td>2011</td> <td>2012</td> </tr> <tr> <td>Cost of Revenue</td> <td>24.98%</td> <td>23.17%</td> <td>26.80%</td> </tr> <tr> <td>Research and Development</td> <td>7.30%</td> <td>10.46%</td> <td>27.49%</td> </tr> <tr> <td>Marketing and Sales</td> <td>8.46%</td> <td>10.59%</td> <td>17.61%</td> </tr> <tr> <td>General and Administrative</td> <td>6.99%</td> <td>8.46%</td> <td>17.53%</td> </tr> <tr> <td>Interest Expense</td> <td>1.11%</td> <td>1.13%</td> <td>1.00%</td> </tr> <tr> <td>Income Tax</td> <td>20.37%</td> <td>18.73%</td> <td>8.67%</td> </tr> <tr> <td>Net Income</td> <td>30.70%</td> <td>26.95%</td> <td>1.04%</td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> </tr> </tbody> </table>


The numbers we find within the 10K (annual report) are starkly different than those we saw in the 10Q (quarterly report). Take an extra look at...

**R&D which has increased from 7.295% to 27.491%

**Marketing and Sales increased from 8.46% to 17.607%

**G&A increased from 6.991% to 17.528%

The massive increases of the above three sub-categories caused net income to drop, and drop hard, from a high of 30.7% in 2010, to 1.04% in 2012. Results like this cannot make investors very happy in the short run.

R&D Expenses, if well directed, can open new avenues to drive revenue in the near future, if not, it can prove to be very costly. This is something we will have to keep an eye on and see if management can produce some positive results on this massive increase in R&D Expenses.

Like R&D, Marketing and Sales can produce positive results, and are vital in a very competitive markets like this one. G&A is the one that worries me the most, we must hope that management has not added people to their payroll just to expand their "kingdom." I know Facebook is still growing, but in my book, this is a very rapid increase in administrative expenses.

What about the big dog?

We now know what Facebook has done over the most recent quarter, as well as their last three full years. This is just comparing Facebook to itself, what might we learn if we compare what we know to the big dog on the block? I am of course referring to Google (NASDAQ: GOOG). Take a look at their last three years:   

<table> <tbody> <tr> <td>Google</td> <td>2010</td> <td>2011</td> <td>2012</td> </tr> <tr> <td>Cost of Revenue Google/Advertising</td> <td>$17.76</td> <td> $17.40</td> <td>$17.11</td> </tr> <tr> <td>Cost of Revenue Motorola Mobile</td> <td>$0.00</td> <td>$0.00</td> <td>$3.45</td> </tr> <tr> <td>Research and Development</td> <td>$6.42</td> <td>$6.81</td> <td>$6.77</td> </tr> <tr> <td>Sales and Marketing</td> <td>$4.77</td> <td>$6.05</td> <td>$6.12</td> </tr> <tr> <td>General and Administrative</td> <td>$3.35</td> <td>$3.59</td> <td>$3.82</td> </tr> <tr> <td>Income Tax</td> <td>$3.91</td> <td>$3.42</td> <td>$2.59</td> </tr> <tr> <td>Net Income</td> <td>$14.50</td> <td>$12.84</td> <td>$10.70</td> </tr> </tbody> </table>

Google has been experiencing a three-year decline in Net Income, but is still dropping 21.399% of their revenue down to their bottom line. This is even more impressive when you realize how large Google has become. This dog can still bark.

During 2010 and 2011, Facebook did a great job barking in its own right, turning in higher net income margin numbers than Google. 2012, however, found Facebook with a serious case of laryngitis after turning in an embarrassing 1.04% net income margin.

I will keep my shares in Facebook, but I am putting them in the "doghouse," and I will be watching them to see if they can get their bark back. If they cannot increase the bottom line, I will redeploy the cash to a better investment.

As far as Google goes, I am keeping them on my watch list as I do not currently have cash to invest. If Facebook does not regain its bark, Google just may prove to be the place to invest.

That is my take, what say you? Please leave comments below.

David Paxton owns shares of Facebook. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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