Is Facebook Finally at a Good Price?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since we discussed Facebook (NASDAQ: FB) last month, the stock has fallen even further from its IPO price of $38 and as of this writing is just above $21 per share. The company’s first public earnings report met sell-side expectations at 12 cents per share, but investors had been hoping for a beat and were disappointed.
In addition, speculation is growing that the end of Facebook’s lockup period will put downward pressure on the stock price as impatient, potentially fearful employees seek to cash out at least some of their stock. As we said in our last discussion, Facebook is a legitimate company and comparisons to the dotcom era of the '90s are not warranted. The question is how many billions of dollars the company is actually worth -- at the moment, the answer given by the stock market is 46.
This market capitalization and analyst expectations represent a forward P/E multiple of 34 and a five-year PEG of 1.6, which while not at enormous growth levels still represent a high valuation. As such, it appears that the relationship that held before Facebook’s earnings report is still true: the market is more optimistic about the company than Wall Street analysts, and therefore the company likely needs to beat earnings estimates in the future for its stock price to rise. Perhaps the short thesis on Facebook, then, is still relevant.
In our previous article we had speculated that JANA Partners’s Q2 letter -- which, among other topics, described the fund as being short “a social networking company with decelerating growth and difficulties monetizing traffic” -- might have been a hint at a bearish position in Facebook.
Facebook’s second quarter 10-Q reported that revenue had risen 38% in the first half of 2012 compared to the first half of 2011. This growth was driven by international revenue, with U.S. revenues rising 19%. In the second quarter of 2012, international geographies made up just more than 50% of Facebook’s business. Net income is down, primarily due to a large increase in R&D expenses: in the second quarter of 2012, the company spent $705 million on R&D compared to $99 million in the second quarter of 2011.
Much of our previous analysis of Facebook’s peers still holds. Zynga (NASDAQ: ZNGA) has fallen even further as investors remain skeptical of its long-term future and game giant Electronic Arts (NASDAQ: EA) has finally taken the step of suing Zynga for intellectual property issues. Since many of Zynga’s games are heavily based on other game concepts, this suit has the potential to establish a damaging precedent for Zynga. LinkedIn (NYSE: LNKD) also matched earnings in its most recent report; we had speculated that a match might send its price down, as it did for Facebook, but in fact the price is up a couple percent since then. A substantial rise in the stock price following the quarterly report made up for a plunge in LinkedIn shares in the days prior to the announcement. LinkedIn now trades at 908 times trailing earnings and 88 times forward earnings, with a five-year PEG of 2.7. Google, meanwhile, has a stable search advertising business and many other properties besides its Google Plus social network; its trailing and forward P/E multiples are 19 and 13, respectively.
We would say that Facebook is better priced than LinkedIn, and that $20 per share sounds like it could serve as a floor for the stock price, but the multiples are still too high. We would like to see some more impressive monetization execution from the company before we recommend it as a buy.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Google. The Motley Fool owns shares of Facebook and LinkedIn. Motley Fool newsletter services recommend Facebook and LinkedIn. 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.