Facebook (ticker symbol: FB) needs no introduction as the social media network that even has a movie written about it. But it may be less clear whether the stock is a buy or a sell?

Has Facebook grown so large with 1.3 billion plus daily active users that the upside is limited? Or is Facebook just getting started monetizing its massive user base by disrupting email with Facebook messenger, and creating virtual worlds following its purchase of Oculus?

Depending on whether you are an investor or a trader, you will need to examine the company through different lenses.

If you are an investor, fundamental analysis will be important to examine whether the stock is undervalued or overvalued. As a trader, you could look to analyze technical chart patterns.

So is Facebook a buy or a sell?

Facebook Chart Patterns

Technical traders use chart patterns to make buy and sell decisions. When certain FB share price levels are breached, order entries and exits are triggered.

It is tempting to make buy and sell decisions by observing recent share prices. But rather than transacting based on the latest share price movements, which are often random in nature, consider using chart patterns as your guide to making more systematic trading decisions.

Technical analysts or chartists examining FB stock price today may use some of the following chart patterns to make buy or sell decisions.

COMMON FB STOCK CHART PATTERNS

Chart patterns commonly followed by technical traders include:

If you choose to buy or sell Facebook stock based on chart patterns, you will generally want to follow standard technical trading practices, such as setting stop losses to avoid losing more than a fixed amount if FB share price were to move against your expectations.

As a short term trader, pay close attention to the commissions costs of buying and selling regularly as well as the impact of short-term capital gains tax.

While these costs may be a headwind as a technical trader, a tailwind may come in the form of algorithmic trading. But what is algorithmic trading?

ALGORITHMIC TRADING

Algorithmic trading is based on programmed rulesets that execute orders when certain conditions are met.

Some estimates claim that as much as 60% of market trading stems from a combination of passive investing and algorithmic trading.

As a technical trader, you can virtually piggyback on the big money algorithmic traders by betting in the same direction.

But making buy or sell decisions based on Facebook stock chart patterns is not without its risks.

TECHNICAL TRADING RISKS

A primary risk when trading chart patterns comes from the movement of stocks after major news events. Facebook stock news streams all day long but which news events can disrupt its technical trading patterns?

One predictable event occurs quarterly when Facebook announces earnings, the stock price can pop or drop by large percentage amounts. The fundamental news event pays no heed to shorter term technical chart patterns – the stock can gap higher or lower depending on how earnings are received.

If there were only one golden rule to abide by when trading Facebook based on chart patterns, it would be to pay heed to predictable events that could derail its technical trend.

Earnings is one example but legal risks, changes in senior management personnel, acquisitions, and new business initiatives could also substantially impact Facebook share price. Another event which often moves the share price is its developers conference.

If you are concerned about the share price declining following one of these events, a married put is one of the best options trading strategies and a powerful hedging strategy to limit risk.

>> Related: How To Trade Options

FB Stock Price & Valuation

As a fundamental analyst, you can compare FB stock price to its intrinsic value to see whether the FB share price is above or below its fair value.

Another popular approach to making a buy or sell decision is to calculate the fair value of Facebook.

This investing method is common among institutional investors who rely on research from Wall Street analysts to guide investing decisions. This research generally examines key factors that will drive revenue and profitability.

For example, how many daily active users are engaging with Facebook and for how long? How many ads are served and what is the average pricing by region? Do competitors, such as Snapchat and Twitter, pose a major risk to Facebook? Is the market size growing or shrinking?

After a rigorous research, financial analysis is conducted to assess the company’s theoretical fair value. If the share price is low compared to the fair value, it might be time to buy FB stock.

Commensurately, a share price well above fair value might suggest it is time to be cautious because the stock may be overvalued.

The following valuation models were used in the graphic below to assess whether Facebook stock value is compelling:

• 5 Year DCF Growth Exit
• 5 Year DCF Revenue Exit
• 10 Year DCF Growth Exit
• 10 Year DCF Revenue Exit
• P/E Multiples
• EBITDA Multiples
• Revenue Multiples

You can see below not only the fair value estimate but also the market price and Wall Street analysts’ expectations.

Facebook Stock Price History

The Facebook stock price history reveals its history of volatility, which you should consider relative to your own risk tolerance for price swings before buying.

The long term Facebook stock price history chart is a helpful indicator to both traders and investors to assess how volatile the share price has been over time.

A good rule of thumb to gauge whether a company would be a good fit in your portfolio is to calculate the share price range from one year to the next, and ideally from peak to trough.

A Facebook stock analysis gives you insight into whether the volatility meets or exceeds your expectations and risk tolerance.

If a 25% swing in a single year would be too much to bear, then perhaps another company would be a better fit for your portfolio.

If you are keen to buy the stock but want to limit risk from potential volatility, consider hedging strategies using options.

To get a better sense of timing entries and exits, shorter term stock charts are helpful.

Casual investors often buy when stocks are moving higher and sell when share prices decline. But paradoxically even though it takes more courage to buy when stocks move lower, that is precisely when they may be “on sale” and offer better value.

As the old stock market investing quote from Warren Buffett goes:

“Be greedy when others are fearful and fearful when others are greedy”

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Facebook Revenues & Earnings

The growth of Facebook revenues is a key indicator that informs investors about the likely profitability of the company in the future. When revenue growth slows, profitability is likely to stabilize or slow too, and investors tend to apply lower multiples to these companies, which can hurt share price performance.

The implicit goal of just about every public company is to “maximize shareholder value” by growing revenues and profits.

Some companies, like Apple, have managed to grow revenues while keep high profit margins.

But more often than not, profit margins decline when companies get very large. For example, Walmart and Amazon are huge but have historically had much lower profit margins than Apple.

Facebook enjoys a business model similar to Google whereby the marginal cost is low for every additional click on an ad.

The more ad clicks, the higher the revenues – and because incremental costs are low – the higher the profits.

The Total Historical Revenues for Facebook are displayed in the graphic snapshot below:

When profits are growing rapidly, the price-to-earnings multiple is generally elevated to reflect the fast growth.

As earnings growth slows, price/earnings multiples contract. These lower earnings multiples are generally accompanied by a transition where growth investors sell and value investors buy shares in the company.

Facebook P/E Ratio

The p/e ratio for Facebook measures its current share price relative to its earnings per share.

Price/earnings ratios are a popular barometer to measure company valuations. A large company growing at a modest pace may trade at a lower price/earnings multiple than a fast-growing company winning market share in an expanding market.

On their own, P/E ratios are helpful but when you flip them upside down you get a much more intuitive ratio. For example, a price-to-earnings ratio of 50 means that the earnings yield is 2% (because 1/50 = 2%).

Another way to think about this ratio is that if you held the stock for 50 years, the company would produce profits equivalent to the principal you invest today (ignoring inflation and the time value of money).

You might think it’s definitely better to choose a low price-earnings multiple as a result, and it is true that lower multiples translate to higher profitability yields. But lower multiples are generally associated with slower growth too.

You may enjoy higher dividends by investing in a company with a lower price/earnings ratio but share price advances will generally be more muted.

Facebook Return On Invested Capital (ROIC)

Facebook’s return on invested capital gauges the profitability and value-creating potential of the company after factoring in the amount of capital invested.

Among the most prized and watched financial metrics among sophisticated investors is return on invested capital (ROIC).

ROIC measures how efficiently a company allocates capital to profitable investments.

There are lots of ways to calculate return on invested capital, including:

• Add book value of equity to book value of debt and then subtract non-operating assets
• Subtract current liabilities from current assets to get working capital and then remove cash and add to the company’s fixed assets.

ROIC is an annualized percentage figure based on the trailing twelve months. If it is greater than the company’s weighted cost of capital (WACC), the company is deemed to be creating value.

Historically, Facebook’s ROIC has been highly competitive compared to its rivals:

Facebook Debt To Total Capital

A company earning more from borrowed capital than it pays in interest may decide to issue corporate debt. Facebook has little need for debt because it can grow rapidly without relying on tangible assets the same way other companies do; for example a grocery store, an alcohol brewing company or a manufacturing company.

Many fast-growing companies are initially financed by venture capital and have no need for debt capital. After they go public, they have little need for debt because they receive shareholder capital.

But over time even big technology companies, such as Apple, have issued debt when it makes financial sense. For example, when a company can earn more on its borrowings than it pays in interest to lenders.

Companies with tangible assets are more likely to take on debt to grow. For example, Coca Cola may choose to take on debt to build a production facility or expand its distribution network, whereas Facebook has little need to take on debt.

Facebook WACC

The weighted average cost of capital, or WACC, for a company is the rate it pays to its security holders to finance the firm’s assets.

Both shareholders and bondholders expect to earn a yield from interest payments, and the WACC measures their requirements.

For example, assume a company needs $1,000 to operate and borrows $500 from lenders and accepts $500 from shareholders.

If the shareholders demand a 20% return on their money while the lenders stipulate a 10% return, then the WACC would be 15%, so the company would need to produce a 15% return to satisfy equity and debt holders.

For Facebook, the weighted average cost of capital is shown below:

Facebook Financials

Facebook financials and a 5 year DCF Revenue Exit model are shown below:

The author has no position in any stocks mentioned. Investormint does not own or recommend any stocks.

Have you bought Facebook stock? What factors did you use to make your buy and sell decisions? How did it work out for you and what lessons did you learn? Enter your comments below.

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The article Facebook Stock: Buy or Sell was originally posted on Investormint

AutoZone (ticker symbol: AZO) is the second largest retailer of aftermarket automotive parts and accessories next to Advance Auto Parts. It has over 5,000 store locations spread across the United States, Mexico, and Brazil. Since its founding in 1979 and listing on the New York Stock Exchange (NYSE) in 1991, it has grown from strength to strength, but is AutoZone stock undervalued or overvalued, a buy or a sell?

AutoZone Stock Price & Valuation

By comparing AZO stock price to its intrinsic value, or fair value, you can calculate how much potential for upside or downside movement in share price exists.

Casual investors will often look no further than AZO stock price to make a buy or sell decision on the automotive parts retailer. Beginner investors sometimes assume that a high share price means a stock is overvalued and a low share price signals it is undervalued, but more insight is needed to make those assessments.

While the company’s share price when compared with its fair value is important when determining whether it is undervalued or overvalued, the share price alone doesn’t provide insight into the company’s valuation.

Wall Street analysts will generally build a discounted cash flow (DCF) model to calculate the valuation of a company. Building an Autozone DCF model would be a valuable and educational pursuit, but it is also time-consuming. After all, a professional research analyst may spend up to a week building such a valuation model.

Below, we provide a quick snapshot of Autozone’s valuation based on the following valuation models:

• 5 Year & 10 Year DCF Growth Exit
• 5 Year & 10 Year DCF EBITDA Exit
• 5 Year & 10 Year DCF Revenue Exit
• P/E Multiples
• EBITDA Multiples
• Earnings Power Value

The estimated share price using each of these models is calculated. Price targets from Wall Street analysts and the current AZO share price are also displayed.

AutoZone Stock Price History

The Autozone stock price history reveals a volatile stock which has the potential to rise and fall substantially over comparatively short time periods.

A 10 Year Stock Price history chart for Autozone conveys valuable information on the share price range over time, so you can better gauge whether its volatility is appropriate for your financial circumstances.

It is clear that AZO stock price moves a lot in any given year let alone from one year to the next. If 20%+ swings in share price would cause you to fret or not sleep at night than perhaps a company with a less volatile share price might be a better fit, or you could consider lowering the risk using options strategies, such as the covered call.

A short-term, 1 year Autozone stock chart doesn’t provide as broad insights as long term 10 Year stock charts, but the short-term stock chart is valuable to view recent share price movements.

AutoZone Revenues & Earnings

The growth of AutoZone revenues is a key indicator that informs investors about the likely profitability of the company in the future. When revenue growth slows, profitability is likely to stabilize or slow too, and investors tend to apply lower multiples to these companies, which can hurt share price performance.

For any company, the goal is to maximize shareholder value, and the best way to achieve that aim is to boost profitability. A company that can increase revenues without its costs rising commensurately will generally experience rising profits over time. Analysts predict future earnings and apply multiples to those earnings when calculating what a company is worth.

The earnings projections for AutoZone are a key performance indicator for investors to focus on. Investors should observe whether earnings are projected to rise. The faster the pace at which they rise, the more likely  it is that the earnings multiple will be higher. And higher multiples translates to higher share prices.

AutoZone P/E Ratio

The price-earnings ratio (p/e ratio) is a valuation metric that compares the current price of a company to its per-share earnings. It is frequently labeled the price multiple or earnings multiple.

A blue chip company that has been around for decades may trade at a lower P/E multiple of say 10, suggesting that its current share price is 10x its per-share earnings.

A fast growing company with global reach potential will often be rewarded by shareholders with a high Price/Earnings multiple, or P/E ratio.

A new technology company that is not generating much in profits may have a high multiple because it has the potential to earn large profits in the future. It’s not unusual for a fast-growing, publicly traded technology company to have a P/E ratio as high as 100, meaning its share price trades at 100 times each dollar of its earnings.

A simple way to think about the P/E ratio of 100 is if you paid $100 for one share of stock, you would expect to get $1 back in earnings at the end of the year. In practice, many fast growing companies don’t issue dividends and pay you back that dollar of earnings (they reinvest it), but the concept is helpful in conveying the premium you are paying for a high earnings multiple.:

AutoZone Return On Invested Capital (ROIC)

The AutoZone ROIC figure measures the profitability and value-creating potential of the company after taking into consideration the amount of capital invested.

AZO ROIC might sound like alphabet soup, but ROIC is perhaps the most important metric any value investor should pay heed to when analyzing any company. ROIC is short for return on invested capital, and is calculated by dividing the after-tax operating income by the book value of both debt and equity capital minus cash and cash equivalents.

If that sounds like a lot of gobbledegook, think of ROIC simply as the value-creating potential the company has after taking into account the amount of initial capital invested.

Historically, AutoZone’s ROIC has been highly competitive compared to its rivals:

AutoZone Debt To Total Capital

Excessive debt can hurt a company’s financial performance or boost returns over the long-term depending on how efficiently the borrowed capital is invested. A company with some debt is often viewed favorably by stock analysts while excessive debt levels can be a cause for concern that any operational mis-step or change in market size or competitive positioning could hurt the company.

A company saddled with a heavy debt burden is no less precariously perched financially than an individual who has borrowed too much. If the costs of taking on debt exceed the benefits, a company will eventually experience falling financial metrics, and share price declines will likely soon follow.

However, a company taking on debt differs greatly from an individual assuming a debt burden because the company uses the debt to ultimately grow revenues whereas an individual typically takes on debt in order to acquire a non-revenue generating asset.

If a company can borrow at a certain interest rate and invest the cash it receives to produce a higher return than it pays in interest charges then borrowing the money may well be a smart financial maneuver.

AutoZone debt levels compared to peers have historically been lower, but higher than its primary competitor, Advance Auto Parts (AAP).

AutoZone WACC

Companies use a formula called the we the weighted average cost of capital, or WACC, to calculate the average cost of raising capital from its security holders to finance its assets.

Shareholders expect a return on their investments, banks require repayment of loans, and bondholders expect to earn a yield too from interest payments. The WACC takes account of the requirements of all these security holders.

The WACC is a very key metric used by companies to assess the overall required return for a firm. To grasp what WACC means intuitively, imagine a company that was financed equally by debt and equity holders:

Let’s imagine the company required $1,000 to operate and borrowed $500 from lenders and took $500 from shareholders.

If the lenders require a 10% return on their money and the shareholders require a 20% return on their money, then the WACC would be 15%, meaning the company would have to produce a 15% return to satisfy debt and equity holders.

For AutoZone, the weighted average cost of capital is shown below:

AutoZone Financials

Below you can see an example of AutoZone financials and a 5 year DCF Revenue Exit model:

The author has no position in any stocks mentioned. Investormint does not own or recommend any stocks.

Have you bought or sold AutoZone stock? How did it work out for you? Share your experiences in the comments below – we would love to hear from you.

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The article How Do I Buy Stock In AutoZone? was originally posted on Investormint

Over 100 million members in 190 countries enjoy streaming movies and TV shows on Netflix, ticker symbol: NFLX.

But the company that began as a DVD-by mail membership service had humble beginnings. In its early days it stood toe-to-toe with Blockbuster, the industry goliath, and won.

Walmart tried to knock Netflix off its pedestal, and lost. So too has Amazon competed with Netflix by offering streaming movies and TV shows as part of its Amazon Prime subscription service.

So, is the streaming video service here to stay for the long-term, will Amazon eat its lunch, and should you buy Netflix stock?

Netflix Stock Price & Valuation

Before buying shares of Netflix, research the company quantitatively and qualitatively to understand not just its financial statements but also its competitive landscape.

When you want to make a buy or sell decision on a company, it is important to gather as much quantitative and qualitative information as possible.

QUANTITATIVE RESEARCH: Netflix Stock Forecast

Quantitatively, you want to know whether the company is adding subscribers, and growing revenues. More importantly, is Netflix able to convert revenues into profits?

As a company expands globally like Netflix has, revenues are generally reinvested to grow the company and acquire more customers.

But over time, it’s crucial that customers rebill and the customer lifetime value is long, so that margins and profits increase.

Quantitatively, we can apply the valuation models below to come up with an assessment of where the share price sits relative to theoretical models:

• P/E Multiples
• EBITDA Multiples
• 5 Year & 10 Year DCF Growth Exit
• 5 Year & 10 Year DCF EBITDA Exit
• 5 Year & 10 Year DCF Revenue Exit
• Earnings Power Value

Current Netflix Stock Quote

QUALITATIVE RESEARCH

Qualitatively, you want to know if competition is a big risk to Netflix. Will Amazon fall by the wayside like Walmart did? Or will it make a push to steal customers from Netflix?

Does Netflix have a moat that could protect it from a competitor conquering it? Typical moats that successful companies have include any one or a combination of the following:

• Network effects, such as the social network effect Facebook enjoys
• Low cost advantage e.g. Amazon or Walmart low prices
• High switching costs e.g. Salesforce.com customers’ data records are hard to switch
• Intangible assets e.g. Coca Cola’s brand

Netflix enjoys a low cost advantage. Its pricing is highly competitive, and to some extent, switching costs are high because the more customers view TV shows on the Netflix website, the more history they are unwilling to leave behind by moving elsewhere. Plus, there is a familiarity aspect to a platform – when customers get used to an interface and navigation console, they often stick with it out of comfort.

Netflix Stock Price History

The Netflix stock price history reveals a volatile stock which has the potential to rise and fall substantially over comparatively short time periods.

Netflix stock price history has been a rollercoaster ride of ups and downs, causing investor heartburn.

Netflix is famous for its double digit percentage price swings after quarterly earnings announcements.

That degree of price volatility that follows Netflix stock news is something you need to pay close attention to before diving in with both feet.

Looking at a 10 year Netflix stock chart, many heart-stopping declines and breathtaking share price ascents have taken place.

Even over any one year time period, the share price has its fair share of turbulence, especially when earnings are received negatively, as well as hair-raising climbs when results are positive.

Netflix stock price history reflects the 7-for-1 Netflix stock split in July 2015.

>> MORE: Discover The Best Value Stocks

Quantitative Research:
Netflix Revenues & Earnings

The growth of Netflix revenues is a key indicator that informs investors about the likely profitability of the company in the future. When revenue growth slows, profitability is likely to stabilize or slow too, and investors tend to apply lower multiples to these companies, which can hurt share price performance.

With its enormous growth globally in almost 200 countries, Netflix has seen a dramatic rise in revenues.

Total historical revenue growth has been exponential as Netflix onboarded customers in every geography it has entered.

But more important than revenues are earnings. How well can Netflix translate high revenue figures into high earnings?

Even if it can’t do so right away because it reinvests its revenues into expansion opportunities, customer acquisition and marketing, will it do so in the future?

To glean those insights, we can peer into the future and see what the expectations are for future earnings growth.

In percentage terms, future earnings for Netflix are expected to skyrocket over the next decade.

Netflix Stock Value: P/E Ratio

The Netflix price-to-earnings ratio (p/e ratio) is a valuation metric that contrasts the current price of Netflix to its per-share earnings. It is frequently labeled the price multiple or earnings multiple.

In its quest to build revenues and take a stranglehold on the streaming movies services business, Netflix sacrificed earnings.

For most of its operating history, earnings were secondary to revenue growth and that is reflected in its P/E multiple.

Conventional fundamental analysis would suggest caution is warranted when p/e multiples are high.

But it’s not entirely unusual or unprecedented when a company has a global opportunity that its earnings are suppressed for years, even decades.

Amazon was historically the poster child for a company with very low earnings yet a share price that relentlessly climbed as it became obvious that it was establishing a dominant market position that could not easily be disrupted by rivals.

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Netflix Return On Invested Capital (ROIC)

The Netflix ROIC figure measures the profitability and value-creating potential of the company after taking into consideration the amount of capital invested.

The big question investors need to answer is how well Netflix can convert revenues into earnings and how good a job it does creating value.

Return on invested capital, or ROIC, gauges the return that an investment generates for stakeholders, both shareholders and bondholders.

To date, Netflix has a so-so ROIC, which is to be expected. But over time, it needs to keep stakeholders happy by ensuring they earn the returns they expect.

>> Related: What Are The Best Stocks To Buy?

Netflix Debt To Total Capital

When debt levels are high, interest payments can eat into profit margins. For Netflix, debt has historically been minimal.

For some companies, taking on debt is a necessary financial strategy to finance projects and growth. But excessive debt levels can suffocate a company over time, especially when a Fed rate hike affects variable loans.

Debt to total capital ratios below 10% are within the normal range and historically Netflix has had a low ratio that would suggest excessive debt is not a concern.

Netflix WACC

How much does it cost a company to raise capital from shareholders and bondholders?

Does the company generate a return that keeps shareholders happy?

Do bondholders earn a yield that satisfies them?

These are the questions that the WACC, or weighted average cost of capital, calculates.

The overall return required by stakeholders is engrained in the Netflix WACC.

Consider as an example a company needing $1,000,000 to operate which receives a loan of $500,000 from lenders and accepts $500,000 from shareholders.

If lenders demanded a 3% return and shareholders expected a 9% return, then the WACC would be 6%, meaning that is the return the company would need to produce to keep both equity and debt holders satisfied.

For Netflix, the weighted average cost of capital is shown below:

Netflix Financials

Below you can see an example of Netflix financials and a 5 year DCF Revenue Exit model:

The author has no position in any stocks mentioned. Investormint does not own or recommend any stocks.

Are you wondering how to buy Netflix stock? Are you looking for Netflix stock ratings? Tell us if we covered your questions.

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The article How Do I Buy Stock In Netflix? was originally posted on Investormint