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Introduction

Facebook (NASDAQ:FB) is one of the world's most notable Internet-based companies, with staggering growth in a relatively short period of time. Its market capitalization has reached $46 billion since its origination as a mere school project of Harvard student Mark Zuckerberg. The company has quickly reached a level where it is competing against tech giants Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL).

Google has not been a direct competitor of Facebook, however, until the search giant launched Google+ in 2011, its own social networking platform. Facebook is primarily a social networking site that earns profit through advertising, whereas Google's primary product is still its search engine - which generates revenue through Ad Words. However, the battle goes on between these two Internet giants. In judging who will come out ahead in the rivalry this year and in the future, there are a few factors that we need to consider. Specifically, we will examine the battleground, issues on monetization, and several challenges that both Facebook and Google face, including the problem of saturation.

What Is the Battleground?

The battleground between Facebook and Google is not necessarily in the financials of the two companies. This is because the foundation of whoever will win, between these two giants, is the number of site visitors. For example, if people make their judgments based solely on the stock prices of both Facebook and Google, there is no doubt that GOOG is more valuable than FB. The current stock price of Facebook is around $22, while Google's is about $675, which is 30 times higher than Facebook's. Hence, examination of FB and GOOG, in terms of their stock prices alone, is not an "apples-to-apples" comparison. Nevertheless, I provided an assessment and examined the financial advantages of FB and GOOG in detail, in my earlier article. Reviewing the chart below, it is evidenced that FB stock is declining against Google's.


(Click to enlarge)

If the battle is not primarily on the financials, where do Facebook and Google compete? The answer is "in online prevalence." In other words, the ultimate winner will be the company that attracts the greatest number of active users, and whose users stay on the site long term. If this is the battleground, then Google should not take Facebook for granted, even when the latter is performing poorly in relation to stock prices. As a matter of fact, there are some indications of how Google views Facebook. For example, Google management attempted to buy a portion of Facebook, which indicated how profitable FB stock could be.

In attracting users, Google has a great deal of ground to make up. Facebook had around 955 million monthly active users (MAUs) in June 2012, while Google had only 400 million registered users, and 100 million active users, in September of this year.


(Click to enlarge)

Challenges for Both Facebook and Google in 2013 and Beyond

Without discounting the importance of financial performance for both Facebook and Google, the biggest challenge facing both of them may be market saturation. This is because saturation tells us that the market has already been captured; when saturation occurs, all potential users have already been reached. Hence, this implies that there will no longer be room for growth.

While saturation may not happen in the short term, this still remains to be a formidable threat for both Facebook and Google. Therefore, both of them need to address this issue as early as possible. These companies can do this by continuously offering new innovations so that they can catch the interest and attention of more and more prospective users. This could be a challenge too, considering that the world population growth rate has been diminishing significantly, according to the World Bank.


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World population growth rate

Make or Break for Investors?

While financials are not the primary basis of the battleground between Google and Facebook, this does not mean that they are not significant. Regardless of who has a wider range of customers, both Google and Facebook need to translate these numbers into a better financial performance.

Analysts evaluating GOOG and FB, have diverse positions on the companies' future performance, as the table below suggests. This situation creates a bit of uncertainty for the average retail investor -- should he or she jump in with both feet (Buy) or remain on the sidelines (Hold) for the time being until additional guidance is received?

GOOG

FB

Wall Street Analyst Ratings

Buy

55%

38%

Outperform

9%

25%

Hold

36%

25%

Underperform

-

-

Sell

-

12%

EfsInvestment Analyst Fair Stock Valuation

Current Stock Price

$675

$22

Fair stock valuation

Well Undervalued

Extremely Overvalued

Potential to reach a fair stock valuation range

16% upside potential to reach a fair stock value

57% premium over a fair stock value

The discounted earnings plus equity model, developed by EFS Investment Partners and applied to both GOOG and FB, suggests the following: At a price of about $675, GOOG stock is obviously undervalued and has 16% upside potential to reach a fair stock value; however, extremely overvalued FB stock is trading at least 57% up on its fair valuation range. In terms of the financial aspects, Facebook needs to stabilize its stock price, or even improve it, in order to appease shareholders.

Summary

Making my current position, I keep in mind that the idea of buying cheap while the stock value rises is a straightforward concept that applies to Google's stock. Moreover, Google has excellent growth opportunities in 2013, as I have already considered them in detail in my previous article.

Facebook has been operating very successfully in the social networking market, and its stock is currently viewed as a "Buy," but only in the short run (i.e., from November 2012 through 2013). With the challenges that the company will face in 2013 and beyond on the issues of saturation, monetization and population, investors will need to consider whether holding it further is a sensible strategy in the long run.

Source: Facebook And Google: Future Challenges In 2013