FB: A prime example

When a company's stock is trading at 114 times earnings, it is wise to take a step back and figure out why investors are willing to wait 114 years for earnings. Too often, investors forget that an investment in a company is actually ownership. Still, valuation aside, FB really made headlines this past week by purchasing "Whatsapp" for 19 Billion in cash and stock. In my opinion, I say kudos to facebook on such a bold transaction. Too many companies are letting cash sit stale on their balance sheets, too afraid to make moves. "Whatsapp" has an estimated billion users, many of whom are international. This exposure is huge for facebook. Facebook's presence internationally is weak. Still, where is the ROI going to come from? The best part of text messages is that there is no ads. As I am not a shareholder in FB, it is not my problem to answer this questions.

$12 Billion in stock plus $3 Billion in restricted stock for employees seems like a minor transaction according to their 8-K. But, how much did this really cost facebook? In my opinion, not much. The spdr XLY and XLK trade at 18 and 16 times past earnings. So, give FB a normal industry average PE of 17, and FB would have had to pay almost 7 times more than they did in equity. FB capitalized on their overvalued stock price -- I don't think anything is wrong with that. More companies should be using their overvalued stock prices as currency to fuel m&a deals rather than authorizing billions in repurchases of  their overvalued shares.

FB bought this company because this is what facebook does. FB prides themselves on their user base, this is where all of their "value" stems from. Whatsapp helps increase its international footprint and this could turn out to be a great deal for FB. But, it is unlikely we will find this out for at least 3 years. If FB can make this acquisition work, while growing earnings, their stock price will continue to soar. I believe a correction in the value will occur at some point in the future, but that goes without saying. FB is a company I would like to hold for a few years. Given its current price of 69 dollars, with a P/E of 114, and market all time highs I would be comfortable potentially buying on the dip. The company's support level has not been tested because investors clearly do not care about really investigating the value on this firm. When the euphoria around FB is gone, this will be a true test of its core values and management team.

First Solar

Recently, I began to search for a strong solar energy company. There is no doubt that eventually the demand for alternative energy will create a paradigm shift in the way energy is purchased throughout the world. Energy will always be  needed. Just like any company, the questions remain the same. Which companies have sustainable business models? Which companies are going to grow? Which companies are managed properly?

After reaching the financials of the 2012 FSLR annual report, it became very clear to me that FSLR is not a company I would want to invest in. Early in the AR the company touts its advancements in R&D, efficiency, and other technological innovations. Despite this, and a very long list of risk factors, I was alarmed.

First and foremost, FSLR's customers rely on bank loans to find financing for solar panels. As rates continue to rise, this will impact the sales of FSLR. But, this may not hurt FSLR as much as other solar companies as FSLR primarily sells to project developers which resell to end users. More alarming than a decline in sales is the unique risk to all solar companies: competitors, according to the AR, may be able to obtain sovereign capital, enabling competitors to operate at minimal or negative margins for an extended period of time. This debacle is a huge problem for investors in the solar industry, and underscores just how integrated politics and finance truly are.

Just to touch on an accounting issue of FSLR, long-term asset impairment, in my opinion should be listed as a risk factor. According to FSLR, "For long-lived assets, when impairment indicators are present, we compare undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to, determine if the asset group is recoverable." Putting the accounting jargon aside, essentially what will happen is that the market value of the panels will drop when technology advances. The panels will no longer have as much value, and the company will have to take a hit on its income statement. Solar technology will advance and will have an impact on its market value of installed panels compared to expected cash flow.

In the company's defense, it has been able to produce improving results in 2013. Although the results are promising, you have to question their validity and transparency. The CEO of First Solar is none other than James Hughes, the former COO of Enron. There is no doubt in my mind that Mr. Hughes has a complete understanding of First Solar and the industry experience to make First Solar a leader in the industry. But, personally, I don't believe FSLR is the strongest company in the industry. I don't have enough faith in Mr. Hughes to bring FSLR to the top. Therefore, I will not invest in FSLR.