Now that Facebook (FB) appears to have finally shaken off the effects of its snake-bitten IPO, eager investors are already raising comparisons between the company and Google Inc. (GOOG) the undisputed king of search and the second largest company by market cap in the NASDAQ.
Google bashers love to point out that the company is little more than an advertising monster masquerading as a tech stock. There is some truth to that if you look at Google's latest financial results. Financial tables for 2013 you can find on the Google website show where Google generates the lion's share of its revenues - advertising. In effect, Google directs its substantial technological prowess towards one end - portals for selling ads.
Google lovers may howl at the unfairness of such a sentiment, citing Google Glass as evidence of a purely technological breakthrough. True enough, but Google is already looking to monetize this potentially ground breaking wearable computing device. On August 13th 2013 Google secured a patent on gaze technology, opening the door to a "pay per gaze" revenue generating stream where advertisers would pay Google each time a user "gazed" at an ad appearing in the glass.
If you look at the company's history of acquisitions and some of its surprising strategic decisions, you could make a strong case most were driven by the need to above all else protect and expand Google's ad capabilities. In the eyes of some investors, Google is faulted for "giving away" the Android operating system. Unlike some other tech titans Google management saw the accelerating trend of mobile technology as a threat to its core advertising revenue. With market acceptance of Android smartphones and Android tablets Google protected its flank.
Now along comes Facebook, a social media behemoth with a reported 1.11 billion monthly active users as of March 2013. Investors eager to cash in on the revenue potential of such a massive user base rushed in to make Facebook the largest IPO in tech history. The shares closed their first day of trading at $38.23 and it has taken more than a year for initial investors to get above water with the shares now trading around $42.
Facebook's second-quarter earnings report released in July of 2013 sent the shares heading north and the trend has not yet reversed. Revenues for Q2 of $1.8 billion beat estimates of $1.6 billion. The best news was arguably the 51% increase in the number of users accessing Facebook via mobile phones and tablets. Forty one percent of Facebook's total ad revenue came from mobile, up from 30% in Q1.
Facebook poses a real threat to Google, and it appears Google knows this. Google created a "better mousetrap" with its initial search engine and one of the key features paved the way to the company's fortunes. Google's founders wanted to tailor search to the individual and it is only a slight skip from search personalization to advertising personalization. Google became more than a digital platform for displaying ad content. Google had the critical ability to target ads. Facebook has the same ability; perhaps even more so. Its users flock to the site to connect with friends and along the way Facebook collects a lot of information to better tailor the user experience. That information makes Facebook a very attractive place for advertisers looking to target specific market segments.
Digital marketing research firm eMarketer released its latest report on the state of digital ad revenue world-wide on August 28, 2013. The headline read "Facebook Sees Big Gains in Global Mobile Ad Market Share."
While that is true, the following table from the eMarketer website shows the size of the mountain Facebook will have to climb to catch Google.
While Google still controls more than half of the market, Facebook bulls can take heart in the anemic growth Google saw from 2012 actual to 2013 estimates. The earlier estimate for Facebook was 12.9% penetration. eMarketer estimates the total mobile internet ad revenue market will increase by 89%, to an estimated $6.7 billion in 2013.
We see the same picture for digital ad revenue across all platforms - Google has a huge lead over all competitors. Here is the table:
Unlike other companies throughout history that seemed content to rest on their laurels, Google is not standing still. In June of 2013 Google acquired Waze Inc., a provider of navigation software that adds social media features to its offerings. Google already is the leader in mobile navigation and the acquisition is seen as a means of keeping its competition at bay. Bloomberg reported that a Cantor-Fitzgerald analyst sees the move as "adding a unique social layer that is complimentary to (Google's) platform and should further differentiate Google from the competition."
In May of 2013 Google launched Google Play, a download source for a host of content from music to magazines, books, and movies, as well as Android apps. Now we learn the company is planning an app store for Google Glass, around the time the product is expected to launch. Google has also launched its own social media platform, Google+ a year ago, but it does not appear to be doing very well.
Google+ is only one example that demonstrates Google is far from infallible. A more serious concern is the acquisition of Motorola Mobility. Google's July 18 quarterly earnings release was a disappointment, with Motorola Mobility's operating losses deepening by 75%. The company is now under control of Google managers and in late August released a new phone, the Moto X, which while well-received, is not expected to be "revolutionary."
Facebook has not been trading publicly long enough for the numbers to have substantial meaning, but taken at face value the company does appear to be overvalued. We included Yahoo! (YHOO) for comparison purposes and because that company's turnaround story appears to be gaining some traction. Yahoo! is still third in total digital ad revenue, albeit a very distant third.
The following table compares some key performance metrics for the three companies:
Trailing Twelve Month P/E
Net Income Growth (3 Year Avg)
Return on Equity (TTM)
Data from Morningstar on Sept 4, 2013
What Does the Future Hold?
Facebook acquired video and photo sharing service Instagram in August of 2012. One year later Facebook claims Instagram now has 130 million active users, but the company has not yet figured out how to monetize the service. Watch for advertising revenue from this popular service.
Google has been nibbling around the edges of hardware entries with its Nexus phones and tablets and Chromebook. The Moto X from Motorola Mobility will be made in the USA and Google Glass will be assembled here in the USA as well. Monetizing Google Glass is a key to the company's future as it would once again demonstrate the company's ability to roll out something new and figure out how to sell ads with the new toy!
In Q2 of 2013 Google supplanted the Apple Corporation as the stock held by most hedge funds. One hundred and fifty seven hedge funds have a stake in Google. While it certainly wouldn't break the company, watch for Google to stay in the lead or fall down in the list. Similarly, watch for Facebook to make the list. The smart money knows.
In the near term Facebook's potential for market share gains make it an attractive prospect. Over the long haul, barring any major miscues on the part of Google management, it is doubtful Google will lose its market leading position. However, successive yearly gains by Facebook eating into Google's wide lead could sour investor sentiment on Google.