On the cover of last weekend's Barrons you'll find a very direct title, "Facebook Is Worth $15" and a number of points made in the piece. A $15 price target has become very common for shares of Facebook (FB), which would be based on the comparison of other technology giants. Now, I am in no way a FB apologist, but I would like to take a look at the points made in the piece to show the "other side" and why I feel the reasons are wrong. Therefore, let's take a look at a few key points made in the Barron's piece.
- The stock is trading with a P/E ratio of 48 and a forward P/E ratio of 36 times 2013 earnings. Meanwhile, Apple (AAPL) and Google (GOOG) trade at 16x 2012 earnings.
The P/E argument has been the most common for FB bears who are betting on the failure of the company and who are screaming at the top of their lungs that the stock is overvalued. First, I must admit that this point is correct. FB is valued considerably higher than either AAPL or GOOG. However, is it a fair comparison? My answer is no!
Why should we compare an Internet-based social media company to either AAPL or GOOG when we don't compare FB competitors Linkedin (LNKD), Yelp (YELP), or Zillow (Z)? To me it seems more logical to compare FB with these three companies rather than two diversified technology companies, as I consider social media companies more of a service than a technology. And if we're comparing apples to apples, meaning social media sites, rather than apples to oranges, FB to AAPL or GOOG, then take a look at how FB measures in terms of P/E and forward P/E to its "true" counterparts (data from Yahoo! Finance).
Forward P/E Ratio
As you can see, when compared with similar companies FB is actually a value play. It is not overvalued. The social media space trades with an unprecedented valuation with investors who are willing to buy the stocks at virtually any price. The good news with FB is that because of its strong user base, the company has the leverage to enter and succeed in a variety of industries. It could very easily add a search bar to its homepage and most likely trump Google for being the most used search engine in the world. These are changes that could occur, leaving a wide range of options for FB. However, in regards to Z, LNKD, or YELP, none of these companies have the same presence of opportunity. I am not sure how much larger any of these other social media companies can become. None have the business model to branch out and become the next GOOG, however FB on the other hand, does have that opportunity, and it is a realistic possibility.
With that being said, I do remember when FB became a public company and it was advertised that each of its near 1 billion users were valued at over $100 each. This was seen as a weakness, however with current valuations what is the value of each user for Z, YELP, or LNKD? Has anyone ever checked? Or do we ignore the value placed on users because these are three stocks that have traded higher? Take a look at the chart below, and see how FB compares to LNKD (the most comparable company) in terms of value per user.
Market Cap (billions)
Value Per User
- Facebook is trading at 10x revenue, twice the valuation of Google
Once again, this is comparing apples to oranges, as FB is not a company that should be compared to a diversified technology powerhouse. However, it should be compared to the three other social media companies in price/sales, as should it be compared in all fundamental and stock metrics. But for argument sake, let's take a look at just the price/sales and leave the overall fundamental picture for another day. And as you will see, FB is not only the cheapest and most attractive, but is presenting the most value by a long-shot.
- Facebook is struggling with mobile monetization, and the management's response has been "trust us." The mobile ads that are working are also alienating users.
A few weeks ago when FB CEO Mark Zuckerburg was interviewed by TechCrunch mobile was one of the main issues. This has been one of the most significant concerns surrounding FB and according to the company's CEO, the new mobile ads are more efficient than the desktop ads.
The fact of the matter is that no one likes ads on desktop or mobile, but they are necessary for a social media company to return revenue. If in fact the new ads are more efficient, then FB is in a great position to double, maybe triple its sales in the fast-growing mobile space. The iPhone 5 is a great advertising tool, as its larger screen allows for more space to advertise. FB can now make ads larger, or it can add more than one ad per page, or it could even make ads smaller and improve the quality of its application. Either way, if the company has finally figured out how to effectively profit from mobile, it will be a new platform to significantly larger revenue, and profits. Therefore, following the comments of Zuckerburg, I view mobile as one of the few strengths rather than a weakness.
- $1 billion Instagram buy is ominous
This bearish comment is tough to argue. It's kind of like when someone says the sky is blue. If you want you could argue the shades of blue or attribute its shade to a cloudy day, but the fact remains that the sky is blue. The bottom line: Facebook paid way too much for a company with no revenue and a handful of employees. This acquisition is what makes people sick at the thought of Silicon Valley. However, if you're going to build a company in Silicon Valley then you'd better play by its rules. Other companies such as Microsoft (MSFT) have made insane purchases, therefore FB isn't the first nor will it be the last, and it's definitely not a reason to consider its business model a failure.
- Demographics don't favor Facebook. It's getting less "cool".
Aside from the P/E argument, this point made the least amount of sense in the entire piece. I'm not sure if the analyst is aware or if he's not used the new iPhone 5, or upgraded to the new iOS, but the new iOS is made for better FB usage. I personally have always been bearish on FB, because I can't stand the site. I'm definitely more of a twitter man. But with that being said, there are new tools on the new iPhone that allow for easier FB sharing on virtually anything that can be read or viewed on the iPhone. Since purchasing my iPhone on Friday, yes I was one of the millions, I've found myself sharing everything including pictures, articles, and even messages on Facebook. The primary reason is because I can and it's been made easier and more engaging with the new iPhone. Therefore, I don't think FB is getting less cool, but rather more engaging with other devices. Facebook is not the next Myspace, FB is too large. There is no way that one billion users are going to migrate onto another platform. Social media is too important in the lives of everyday people. Therefore, people may use other platforms, but FB remains one of the key platforms that all people who are active on social media use. And I don't see this changing anytime soon.
Like I said, I'm not a Facebook apologist but rather someone who sees the inequality of value between the most promising company in the space (Facebook) and then every other social media company. I think Zuckerburg is too young and doesn't have the slightest clue of being a CEO for such a large company. I think he should've continued playing games and let the big boys run the company and handle the media. However, FB is in fact the strongest company in the space, and is also the cheapest in terms of valuation. It's very possible that $15 could be reached, but if Zuckerburg has in fact monetized mobile and is ready to make FB more profitable, then the sky is the limit. And if Facebook fails and falls to $15 per share, it won't be for these five key points made in the Barron's piece, but rather a failure to innovate.