Is Facebook a Healthy Stock for Your Portfolio?

With shares of Facebook (NASDAQ:FB) trading around $69, is FB an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock's Movement

Facebook is engaged in building social products in order to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family to discover what is going on in the world around them, and to share and express what matters to them with the people they care about. Developers can use the Facebook platform to build applications and websites that integrate with Facebook to reach its global network of users, building personalized and social products. Advertisers can engage with more than 900 million monthly active users on Facebook — or subsets of its users — based on information they have chosen to share.

Facebook's recent acquisition of WhatsApp is prompting privacy probes throughout the European Union. A top privacy regulator for the EU claims watchdogs want to keep an eye on the mobile messaging service and Facebook. It's this large acquisition that sparked serious interest in WhatsApp from the authorities. Bloomberg News added, "The proposed cash-and-stock acquisition would be the biggest by Facebook, the world's largest social network, and gives WhatsApp roughly the same valuation as Gap Inc. and more than half the market value of microblogging service Twitter (NYSE:TWTR). WhatsApp lets users send messages through its service on mobile devices based on different operating systems including Apple (NASDAQ:AAPL)'s iOS, Google (NASDAQ:GOOG)'s Android, Microsoft Corporation (NASDAQ:MSFT)'s Windows Phone and BlackBerry Ltd (NASDAQ:BBRY)'s software."

T = Technicals on the Stock Chart Are Strong

Facebook stock has been exploding to the upside in recent years. The stock is currently trading near all time highs and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Facebook is trading above its rising key averages which signal neutral to bullish price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Facebook options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Facebook options	42.62%	36%	33%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
March Options	Flat	Average
April Options	Flat	Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let's take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Facebook's stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Facebook look like and more importantly, how did the markets like these numbers?

	2013 Q4	2013 Q3	2013 Q2	2013 Q1
Earnings Growth (Y-O-Y)	1,322.38%	108.33%	58.33%	0.00%
Revenue Growth (Y-O-Y)	5.65%	59.75%	53.13%	37.81%
Earnings Reaction	14.10%	2.44%	29.61%	5.61%

Facebook has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Facebook's recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Facebook stock done relative to its peers, Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), LinkedIn (NASDAQ:LNKD), and sector?

	Facebook	Microsoft	Google	LinkedIn	Sector
Year-to-Date Return	27.02%	0.24%	8.89%	-2.19%	3.31%

Facebook has been a relative performance leader, year-to-date.

Conclusion

Facebook looks to provide a valuable social networking experience to its users, developers, and advertisers. The company's recent acquisition of WhatsApp is prompting privacy probes throughout the European Union. The stock has been exploding to the upside and is currently trading near all time highs. Over the last four quarters, earnings and revenues have been increasing, which has left investors pleased about recent earnings announcements. Relative to its peers and sector, Facebook has been a relative year-to-date performance leader. Look for Facebook to continue to OUTPERFORM.