Is It Time for You to Unfriend Facebook?

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

A few weeks ago, I wrote a post titled "Young, Broke and Foolish" on why Facebook (NASDAQ: FB) and Linkedin (NYSE: LNKD) were both promising investments, albeit each for different reasons: Facebook for its exponential growth in revenue in mobile advertising and users added to its already global reach, and Linkedin for its efforts to monetize its more business savvy user base and generate meaningful profits from diverse areas.

This article proved to be not so popular with some. Readers felt Facebook and LinkedIn were already terribly overvalued, over-hyped and prone to market manipulation. Although we Fool's never believe in timing the market, it is interesting to note the following chart showing each company's stock price since my article:

<img alt="" src="http://media.ycharts.com/charts/d375d9792aeeadd2d1d6a56bf19248a0.png" />

FB data by YCharts

The Great

In the time period reflected above, Facebook announced its second quarter earnings, which soundly beat analysts consensus at earnings per share of $0.19 on revenue of $1.813 billion, earning the company a $92 billion market capitalization. The huge rush was fueled by the news that the MAU's on Facebook's mobile platforms spiked nearly 50% from the same time last year, and consequently, mobile advertising rose to 41% of ad dollars. This is great news for the company and the investors who saw the potential when Facebook's stock plunged post-IPO. Although I still stand by my love of Facebook, I have some serious new reservations.

The not so great

Facebook is now trading at an astronomical forward P/E of 167, and that $92 billion market cap is only being supported by $431 million in net income. Facebook has grown, and with every growth there is a correction. Investors are expecting perfection out of Facebook from now on.

Although I do not doubt Mr. Zuckerberg's ability to steer his company towards greatness, it will be next to impossible to continue this exponential rate of growth and please the hordes of investors with high expectations. Facebook still has yet to fully roll out its video advertising platforms, which can add quality ad revenue, and is still overly dependent on advertising as a whole. In spite of this, I am holding tight to my Facebook shares, happily, and waiting to see what Mr. Zuckerberg can deliver.

The future?

LinkedIn doesn't have quite the investor fandom of Facebook, but nevertheless I am still a fan, and user, of Linkedin. However, I still have reservations about the stock.

LinkedIn is in a similar boat as Facebook is now. Trading at a forward P/E of 665 and sporting a $26 billion market cap. Investors again have exceedingly high expectations of Linkedin in the future. LinkedIn was able to report $0.40 in basic earnings per share, which beat the analyst consensus at $0.31. While LinkedIn is trading at a higher forward earnings ratio than Facebook, I believe it still is an investment to look at, or hold onto.

LinkedIn has a leg up on Facebook in the future. While Facebook derives almost 80% of its revenue from advertising, LinkedIn has a more diversified stream of revenue from Talent Solutions, Premium Subscriptions and Market Solution areas.

The Talent Solutions area gives me the most hope. Just like travel agents were killed off by Priceline.com and others that transitioned an entire industry, LinkedIn will become the new resume service for the future job hunters. With the economic recovery on its way and a new generation coming into the workforce or getting ready to, Linkedin can become the place for employers to fill positions with the brightest and most able candidates through services like LinkedIn's Talent Solutions. 

The bottom line

Facebook has had outstanding success recently and has impressed investors and given the company new life. If Mr. Zuckerberg can deliver on new advertising techniques such as video and expand mobile revenue, then Facebook just might be able to live up to investors' crazy high expectations for the company.

LinkedIn, even with its inflated P/E and still developing market, has a huge opportunity to become the job seeker's best friend in the future. Diversified revenue and growing profits can help this business-savvy social network get promoted into an industry mover.

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Jacob Norte has stock in Facebook. Connect with Jacob at jacobnorte.com or on Twitter, @jacobnorte. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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