Facebook and Apple: Time to Buy Both?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Facebook (NASDAQ: FB) has been looking for ways to make its advertising infrastructure work in a post-PC world in which advertising space is limited to small screens and long news feeds. Hedge fund tech guru Philippe Laffont remarked in July that Facebook would be experiencing major headwinds and that Apple (NASDAQ: AAPL) could triple in value. Since July, Facebook shares are down over 30 percent, while Apple shares—though a worry to some investors—are up about 5 percent. Does Laffont's call still hold, or could one justify initiating a position in both stocks?

Facebook's recent efforts to marry online shopping and social utilities might pose a significant challenge to Laffont's idea. In September, Apple announced that it would be discontinuing its social utility, Ping, and instead adding Facebook's ubiquitous “like” button to music and app download pages. What's more, Facebook is also reportedly testing a new “want” button, which will allow it to explore new streams of revenue in the retail space. The appeal of Facebook advertising is simple: it directs its users to online retailers based on the proprietary information it possesses about its users.

Though there are skeptics about the overall efficacy of Facebook advertising, the company still stands to be a foremost mover in this space. The “want” button testing is likely to evolve into a full-service “Collections” concept. This would give users the opportunity to choose among “like,” “want,” and “collect” buttons as they view a given piece of merchandise. The addition of Collections buttons to the “like” button would pose significant competition to Pinterest, who initially pioneered the idea.

Investors should not discount the particular grip that iTunes has on the downloadable music market—a grip that translates to leverage for Facebook. iTunes is a prominent application for mobile devices, a fact that is often ignored. Apple allows songs to be shared and played among different devices through iTunes, so it is possible that, by hitchhiking on the back of iTunes, Facebook could see a similarly positive proliferation onto mobile devices. This might help to address concerns made by Oppenheimer analyst Jason Helfstein earlier in October that the turn from desktop PCs to mobile devices was not “evolutionary” but “revolutionary.” So, along with the Collections development, we might see an iTunes hitchhiker making its way onto mobile devices in order, finally, to monetize this enormous user segment.

We think the concerns of these skeptics are largely reflected in Apple’s current share price. The company's shares are trading at a cheap 12 times forward earnings, though we realize that consensus analyst earnings estimates for 2013 are likely slightly inflated. Jim Cramer even chimed in on Tuesday, saying that the recent 10 percent correction, along with the attractive $120 cash/share, is cause enough to initiate a position in the company. We view the valuation for the company as positive, while we see the possibility that Google (NASDAQ: GOOG) and Amazon.com (NASDAQ: AMZN) will pose threats to iTunes through the pairing of e-reader/media download services from the respective companies.

Facebook is trading at a multiple about three times higher than that of Apple, so opportunities for growth, such as that of social utility/retail partnerships, are pieces of real estate that Facebook needs to develop in order for its valuation to make sense. Facebook does not need to deal with the hassles of hardware development, allowing it to introduce new interfaces (i.e. a “want” button) and to fix app problems (i.e. with HTML 5 debacle) rather adroitly. We think, though cautiously, that Facebook and Apple warrant a closer look in the coming months. 

Compare and Contrast

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This article is written by Brian Tracz and edited by Meena Krishnamsetty. Brian has a long position in Apple. Meena has long positions in Apple and Google. The Motley Fool owns shares of Apple, Amazon.com, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, Apple, Facebook, 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.

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