LinkedIn vs. Facebook: Why Facebook Wins the Battle
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
How many things in life are really, really good, yet still over-rated? Madonna? Justin Bieber?The McRib sandwich? The TV series Mad Men? Well, you can add LinkedIn (NYSE: LNKD) to that group.
LinkedIn is a company redefining how employers and employees find and relate to each other. It's a company growing nearly 100% a year. It's a company with 87% gross margins. It's heading for the moon.
For now, LinkedIn deserves to be considered a desired monopoly. It is the world’s largest dedicated employment networking site. And most people agree that there should be just one of those. Cementing LinkedIn’s status is its role as the center of a large and growing Human Relations (HR) ecosystem. It's $26 billion market capitalization is more than five times the value of BlackBerry, and one-third of Facebook's (NASDAQ: FB) market capitalization. The company has over 238 million members, and is increasing the number of users by double digit percentages every year. To me, this situation sounds more like a bubble than a healthy company, but without statistical facts to back it up, that opinion is just that: an opinion.
LinkedIn vs. Facebook
At their core, Facebook and LinkedIn are social networks. With one big difference: Facebook has over 1 billion members and LinkedIn has “only” 238 million.
Facebook has not made a major effort to provide a LinkedIn-style professional network service. However, Facebook does offer several services that could be interpreted as competitive. First, of course, virtually every business in the world has a presence on Facebook, where it curates (to varying degrees) its image. The second aspect is the many applications that operate “on top” of Facebook’s vast network.
BeKnown, is a Facebook application designed to be a recruiting platform. The application is controlled by Monster.com (NYSE: MWW), the largest dedicated job search site, and largely seeks to extend the Monster search tools and site experience onto the Facebook network. BeKnown only went “live” in mid 2011, but is starting to be recognized by many professional organizations on Facebook.
Despite this growth, Monster Worldwide still only ranks No. 526 globally and No. 117 in the United States for online traffic, compared to LinkedIn's 14th, and 10th positions, respectively. Monster.com simply doesn't stand a chance; the company's technology is outdated and the only thing it's been doing lately is cutting costs, which is only a short-term solution. The only real competitor to LinkedIn is Facebook, and the thousands of applications it hosts and creates everyday.
With LinkedIn's Price/Earnings (P/E) ratio approaching 700 and the stock price at its all-time high, many would argue that the stock is overvalued from those numbers alone, but like any savvy analyst, we must dig a little deeper.
Free cash flow yield (FCF) shows you what percentage of a company's share price is represented by the cold, hard cash it's churning out. The higher this percentage, the better. Lets compare LinkedIn to its social media rival, Facebook.
Data by YCharts
As the chart depicts above, Facebook's free cash flow yield is nearly four times that of LinkedIn. Some investors regard free cash flow (which takes into account capital expenditures and other ongoing costs a business incurs to keep itself running) as a more accurate representation of the returns shareholders receive from owning a business, and thus defer to free cash flow yield as a valuation metric over earnings yield, which is why I've used it herein. LinkedIn's free cash flow margin has averaged about 10.2% during the past 3 years. As such, many analyst expect them to maintain that margin. Facebook on the other hand, has experienced some decrease in their FCF percentage, especially since their precipitous IPO drop, but since the stock recently recovered all of its lost value, expectations for future cash flow growth are nearly identical to LinkedIn.
Another metric to consider is the price to cash flow ratio, which is used to compare a company's relative market value to its cash flow. In theory, the lower a stock's price/cash flow ratio is, the better value that stock is.
Data by YCharts
As seen above, LinkedIn is over three times more expensive than Facebook when considering the current market price and the cash flow of the companies. Surely, investors are willing to pay more for a stock that has 100% growth and profiting nine out of every ten dollars they make, but the aforementioned statistical facts point towards a bubble, rather than a healthy company. With both companies having future cash flow expectations that are very similar, Facebook is clearly the better value here.
According to Alexa.com, LinkedIn's time-on-site has declined 3% over the past three months and is expected to continue to drop. The company's P/E ratio is becoming somewhat mythical, and the graphs above show that the stock is clearly overvalued. It is my conviction that LinkedIn is beginning to hit its ceiling.
Facebook however, has the ability to track personal detail leads to highly targeted ads, which is a big plus. If the company can find more ways to monetize its user base, without ticking off its users, the potential is unlimited, and the ceiling is non-existent. The stock also just recently surpassed its IPO price, a big milestone that many corporations never achieve.
As Warren Buffett once said, "The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money."
LinkedIn is virtually working with effortless money, and if investors want to find a stock that is just starting to come into its own, at a healthy price, I wouldn't recommend looking at this professional network. The same is true for Monster. If you are in investing in this space, Facebook provides the better value.
Chris Johnson has no position in any stocks mentioned. 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!