Facebook Vs. LinkedIn: Buy The Bargain, Sell The Bubble

Includes: FB, MSFT
by: Mark Krieger

In the stock market, the name of the game is to buy low and sell high. But usually, investors do just the opposite. They buy high and try to sell higher by jumping on the momentum train. Eventually, the momentum buyers end up trying to "off" their shares to a set of greater fools, before the bottom falls out- a very risky game for sure.

Warren Buffett says buy stocks when they are unpopular and sell them when they are popular. It makes perfect sense, because how else are you supposed to buy low and sell high? Stocks are cheap when they are unpopular and expensive when in demand. There is no doubt that Facebook (FB) is an unpopular stock, it is more than 50% down from its high and doomsday talk is consuming it. Talk of the unlocking of stock options, slowing growth and inept management has pushed potential buyers to the sidelines and sellers into a "sell now and ask questions later" mentality. Fear is definitely getting the best of the shares.

The fact is, at only 33 times 2013 estimates of 63 cents (assumes a very realistic 31% earnings growth) the shares are the cheapest in the social media space. This is in contrast to LinkedIn (LNKD) which is only 3% from its all time high, sells at dizzying multiple of 89 times 2013 earnings of $1.23, and assumes "pie in the sky" earnings growth of 71%. I am not saying that LNKD's future price action will be reminiscent of a "Netflix" (NFLX) or an "Open Table" (OPEN) spectacular fall from grace, but it is hard not to argue its risk factor outweighs its reward possibilities, especially after the huge run up it has enjoyed.

Obviously the market should give LNKD a higher multiple, because of its growth rate superiority, but a factor of 2.7 is way out of whack. The argument is even more compelling when considering FB's sales per employee is $1.09 million, compared to LNKD's paltry $258,000 per employee, highlighted in a recent Motley Fool piece.

Putting it in perspective: although FB's market cap of $39 billion is 3.5 times greater than LNKD's, Zuckerberg's company is slated to earn nearly 15 times more than LNKD in 2012. To further illustrate the lunacy of LNKD's valuation, it is interesting to note that (KR) Kroger (the largest US traditional grocery retailer) possesses about the same market cap, yet its cash dividend alone is nearly four times the $68 million LNKD is expected to earn in 2012, and its earnings of $1.29 billion are 19 times higher. Logic would dictate that if KR earns that much more, its market cap would follow the same progression. The disparity reaches epic proportions if you add in sales metrics, evidenced by KR's revenues of $92 billion versus LNKD's top line of $927 million.

Facebook has been decimated: To say, Facebook has been taken out behind the wood shed and beaten beyond recognition is an understatement. The type of hate selling this stock has attracted lately, has clearly created a golden opportunity to exploit. Look for the shares to jump 20 to 25% at the drop of a hat. This will happen when the market comes to the realization that things are simply not as bad as some analysts and short sellers have conjured up. Bargain hunting and short covering should be the fuel for a rapid rise back to the $25 to $26 vicinity, as the stock is being set up as a highly coiled spring ready for release.

The bottom line: Short LNKD when it falls below $105, go long FB if it rises above $22.50.

Disclosure: I am long FB.