Why Google is a Better Bet than Facebook
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
General Motors (NYSE: GM) announced on Tuesday that it will be cutting off its $10 million Facebook (NASDAQ: FB) advertising budget because the company is not convinced about the value added by spending money in the social network. According to the Wall Street Journal, the marketing team at GM has been questioning the effectiveness of the ads, and they were unconvinced after meeting with Facebook executives to discuss the issue.
The news, coming from such a big advertiser as GM, wasn't precisely the best public relations for Facebook, and the timing could hardly have been any worse, just a few days before the IPO. Nevertheless, it wouldn't be wise to put too much importance into what happened between GM and Facebook -- the car builder was already having problems with its social media ad agency, Big Fuel, and they changed agencies in December, so there are reasons to believe that what happened to GM may be related to the specifics of its own strategy.
Facebook is already very successful among the public, and having so much time and attention from its users, it will likely find a way to correctly capitalize those important assets and turn them into a profitable advertising business. However, when it comes to the online advertising business, I'm sticking with Google (NASDAQ: GOOG).
Google has something that Facebook cannot match: the strategic value of its search business. Selling ads to a user who is searching for information about a specific product is in many ways superior to the Facebook business model. If you run a Mexican food restaurant in a certain area, for example, you're probably very interested in appearing on the search results for Mexican food in that area. And you certainly don't want your competitors to appear before you in those search results.
Facebook has the lead on the fact that users say a lot about themselves on that site, so the social network can tell its advertisers a little more about the kinds of people who will see their ads. But the ads are shown to people who on most occasions are not interested in such information; even worse, they are probably too busy playing games, chatting with friends, or stalking an ex-girlfriend to notice.
Google is also better positioned in the mobile business, which is where traffic is growing more rapidly. According to comScore Google sites lead as the top property on iOS, Android and RIM devices, reaching 96.9% of the U.S. mobile audience, followed by Facebook, Yahoo sites, and Amazon sites.
When analyzing only apps traffic, which is another high growth segment, Google obviously leads in Android-based devices by a wide margin, but also on iPhones, Google maps has the second position behind the iTunes app, while Facebook comes in third place.
Investors looking for a way to bet on online advertising can find in Google the undisputed leader in the industry with a proven business model and trading at a very reasonable valuation with a forward P/E below 12.5. Facebook will probably find a way to implement a successful strategy over time, but I don't see the point in choosing Facebook over Google at a much higher valuation and while the company has not proven its earnings power yet.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend General Motors Company and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.