ITGOW Part 4: Why Own Facebook When You Can Own Google And Apple?

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 |  Includes: AAPL, DECK, FB, GOOG, GRPN, JNJ, KMB, NFLX, VFC
by: Jay M. Taylor

Wow, Facebook (FB) sure knows how to make an entrance! Throughout the past few months of Facebook-related drama I have tried to remain patient, cautious and quiet. In hindsight, it is pretty easy to point to the bungled IPO and say "Well duh, there was way too much supply!!" or any number of similar criticisms of the IPO itself. It's also easy to look at Facebook's lows below $26/share and say "the markets definitely punished Facebook too hard, it's due for a pop," which you would've gotten if you bought at the right time and sold at the right time ... which was pretty much anytime before the 8% decline on Monday.

In this article, the 4th of my series Investments To Grow Old With (ITGOW), I will take a look at several good reasons to own Facebook ... and why owning Google (GOOG) and/or Apple (AAPL) makes a lot more sense for the very same reasons. I will also discuss how Google and Apple fit with ITGOW Theme #1, Data, of the long-term investment themes outlined in my article introducing the ITGOW series. Feel free to check out the full list of long-term themes.

Round #1: "900 Million Active Users, think of the ad revenue!!"

According to PC Mag, Facebook now has over 900 million "active" users. Wow, congratulations. I'm not sure how they count their active users ... but I'm personally responsible for 8 or 9 "people" on Facebook and ignore friend requests from obviously-fake profiles all the time. Even if you believe that there are actually 900 million active users or, by now, over 1 billion active users, Facebook still gets only the 2nd most traffic on the web. Who's in first? Google, of course. In fact YouTube rounds out the top 3 and, since it is owned by Google, it makes my point even clearer: Google gets WAY more traffic than Facebook. (Source: Alexa) Google first saw 1 billion unique visitors in a single month as far back as May 2011.

Round winner? Google.

Round #2: "Almost every company I know is on Facebook!"

It's true, just about every major company I can think of is on Facebook in some capacity. In fact, part of my full-time job (you know, that thing I do when I'm not watching the markets) involves overseeing 12 Facebook pages and 1 semi-fake profile, not to mention my own Facebook profile. Despite the fact that I spend several hours of every day working on developing the reach of these brands and interacting with customers ... the companies that I work for haven't spent a single dime on anything related to Facebook besides their labor costs for me and a couple of interns.

Here's why Google beats Facebook hands-down on this point: When I use Facebook (my personal page, not the work stuff) I don't want to be marketed to. It's as simple as that. I go on Facebook to catch up with old friends, share funny videos involving cats, post articles about not-quite-end-of-the-world type disasters, etc. When I want to learn more about a product I want to buy I will type its name into Google. When I want to shop around for a better price I use Google as well. I don't do this because Google markets to me, I do this because their search engine is very good at what it does. It just so happens that Google's AdWords product is a really really good product and just so happens to make their superior search engine so profitable for them.

Sure, I don't always want to be marketed to when I use Google either ... but the difference? I find Facebook advertisements to be annoying and Google advertisements tend to be rather helpful. This is probably because I don't use Facebook to buy stuff whereas I do occasionally use Google to buy stuff. I recognize that this is anecdotal and individual experience but I also am in the generation that grew up using Facebook and have been using it actively for 6 or 7 years. I believe that my opinion on this matter and the similar opinions of those around me are important.

Even if you think that things consumers see on Facebook may have a significant impact on their purchasing decisions I would argue that this is rarely related to a brand's paid activity on Facebook and rather from one person seeing what another person has posted about a product or service they purchased. Remember that whole "peer pressure" thing? Keeping up with the Joneses? I'm not alone in this thinking. Remember when General Motors annouced that it was ceasing paid Facebook activity? GM had even met with Facebook executives to express their concerns with Facebook advertising and left the meeting, apparently, unconvinced by the Facebook team. Whether or not this announcement is the precursor to other major brands following suit is irrelevant. The fact is that many brands never started paid activity in the first place. Why would you? It's the wrong platform.

Round winner? Google.

Round #3: "Facebook now has all of my data! That's got to be worth something!"

This Round touches on ITGOW Theme #1: Data in its purest form. Our ability to generate data has far outpaced our ability to store, manage and keep track of it as individuals. Some data we create without even knowing it (such as Google search logs) while other data we intentionally create and save (documents, photos). Companies that can effectively monetize this data or make money from the storage and processing of this data are well poised for the future, as data creation should continue to rise.

Facebook has a LOT of personal data about its users. In my opinion, this is the best thing that Facebook has going for it and what makes it likely to still be around in 20 years. There's only one problem ... Google has all of my data too! Google keeps a log of every single thing that I have ever typed into its search bars. Google has access to every word sent to me or every word I have ever typed into gmail (Google's free and ultra-convenient e-mail product). Since I use an Android phone, Google has my contacts and knows both who I call and how long/often we talk. I don't tell you this to make you think that Google will someday make a killing blackmailing 50% of Americans (though the margins would be excellent if you don't count the lawsuits that would surely follow). I tell you this because this is extremely valuable data. Facebook has data too, don't get me wrong. They know who I've dated and for how long (or at least when we've made it "Facebook official"), who I've been friends with, what I like, who I like, where I like to go, they even have every word sent to/by me using its Messages platform or the Facebook Chat feature. But this data is only worth anything if they can either sell it (highly unethical and, ultimately, bad for business) or use it to market to me. And in case you missed Round #2, I don't go on Facebook to be marketed to. I click on Google ads all the time ... but I can't remember the last time I clicked on a Facebook ad.

Apple has a lot of my data too ... but this data is different. Apple has all of my music, my photos, my videos, and all sorts of other stuff that I've backed up using iCloud. This data is either stuff I have paid for, like music and videos, or stuff I would gladly pay to get back if I ever lost it, like photos and documents. That's valuable data.

As of March of this year, half of every U.S. household owns at least one Apple product. (Source: CNBC) More from that article:

But Apple doesn't have to worry about brand saturation any time soon. Americans don't stop with just one device. Homes that own at least one Apple own an average of three. Overall, the average household has 1.6 Apple devices, with almost one-quarter planning to buy at least one more in the next year.

"It's a fantastic business model - the more of our products you own, the more likely you are to buy more," says Jay Campbell, a vice president of Hart Research Associates.

"The more of our products you own, the more likely you are to buy more" became even more true with the launch of iCloud. If Apple has all of the photos I cherish, songs I love and other important consumer data I depend on and its transfer from device to device is almost seamless, why would I ever move to another brand? One might point to price, then I'd point right back to the fact that Apple's devices don't suck like many other devices do, including the Android phone I am stuck with for another year or so. Plus, it's hard to get that data off of iCloud to switch to another brand's device even if you wanted to.

The data that Google owns is valuable because they use it to market to me (a.k.a. make money) and even improve the effectiveness of its search tools. The data that Apple owns is valuable because they use it to keep me from buying another company's consumer electronics (a.k.a. make money).

Round winner? Google and Apple tie.

Round #4: "Facebook is changing the world. All the kids are using it!"

Looking at what the "kids" are using isn't always a bad way to go. If I had invested based on that strategy back when I first started using Facebook (we're talking 2005 or so) I would've been buying Apple, Uggs (DECK), The North Face (VFC) and Netflix (NFLX). Despite the major drop in Netflix and lackluster performance by shares of VF Corp (owners of The North Face), this strategy would still have been wildly profitable.

But investing in what the kids are into doesn't always work out. Remember Razor Scooters? What about Beanie Babies? Man, my Pokemon Card collection was worth a fortune! Err ... that is right up until it was barely worth the paper it was printed on. My point is not that Facebook is a fad because, at this point, I think Facebook has proven itself to be able to remain (at least a little) relevant as times change.

My point is that even if all the kids (and now a lot of other people) are using Facebook, just about everyone who uses the internet uses Google in some capacity. For me, Google is synonymous with search the same way that Kleenex (KMB) is synonymous with tissues and Band-Aids (JNJ) are synonymous with adhesive bandages. Google is how I use the internet. I use it for e-mail, document sharing, search and much more. Google isn't just what the "kids" are doing, it's what almost everyone is doing.

But if you really wanted to invest based on what the "kids" were using all you had to do was walk around a library on a college (or prep-school) campus any time in the past 8 years. I remember reading articles that talked about how less than 1 in every 10 laptops was a Mac but then turning around and looking around the library and seeing more like 5 of every 10, sometimes much higher. Even many the departments that used to require students to buy PCs due to course-specific software only available on PCs, like the Business and Engineering departments, have relaxed this requirement now that you can run Windows AND Apple OS on a Mac laptop. I haven't even seen an MP3 player other than the iPod Touch, Nano or Shuffle in a long time either.

Round winner? Apple, Google a close second.

Round #5: "Facebook is the next juggernaut!"

Ok ... let's be real. There is a reasonable chance that Facebook is here to stay. But there is also a very good chance that Facebook will go the way of MySpace, Friendster, Digg, Groupon (GRPN) and countless other social-media related sites that have faded into obscurity. Sure, MySpace, Digg and even Friendster still exist and Groupon hasn't gone bankrupt (yet), but these companies are mere shadows of the valuations they once boasted.

And while there's always the chance that the hundreds and hundreds of millions of people who use Google services or the tens of millions of people who own Apple products will change their ways and that they, too, will fade into obscurity, I like the odds. Google is a much more developed company than Facebook, entrenched in search and paid advertising with a product that, by all accounts, is still best in class. Apple, even if you believe that it will struggle to innovate without Steve Jobs (may he rest in peace) at the helm, most likely has a pretty stocked product pipeline that will fuel the next leg of growth. Whether or not you believe that Apple will hit home runs with a television, Siri integration in cars or by buying Twitter, it is hard to ignore the growth and superior customer experience of not only its individual products but of its entire existing line (Macbook, iPad, iPhone and even iPod Touch). Maybe it's true that Facebook is the next juggernaut, but Apple and Google are clearly already juggernauts!

Round winner? Apple, Google a close second.

The Bottom Line

The bottom line is simple. Why would you ever want to own Facebook with a Price-to-Earnings ratio (P/E) north of 90 (even after Monday's 8% decline) when you could own Google for a P/E under 18 and Apple for a PE under 15?! (Yes, yes, I know ... Law of Large Numbers) On top of that, don't forget about the upcoming end of share lock-ups for Facebook employees and what happened when the Groupon lock-up ended.

I was thinking this when people were blindly placing orders with their brokers for as much of the Facebook IPO as they could get their hands on, and I am still thinking the exact same thing today: Why own Facebook when you can own Google and Apple? (I'm sure I'll never hear the end of it in the comments section for saying this but ... ) I dare you to find a technical OR fundamental basis to suggest that Facebook is a better buy than Google or Apple. Thanks for reading.

Disclosure: I am long GOOG, AAPL. I also own AAPL Calls. I have no plans to trade any of these positions in the next 72 hours.