Valuation Showdown: Facebook vs. LinkedIn vs. Groupon
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Three of the most highly anticipated Internet IPOs of the last couple of years have been Facebook (NASDAQ: FB), LinkedIn (NYSE: LNKD) and Groupon (NASDAQ: GRPN). All three of these companies came public at lofty valuations and were viewed as tech darlings at the cutting edge of the social revolution. The three companies, however, have had very different track records since hitting the public markets.
Although Facebook is by far the largest, its performance has been dwarfed by that of LinkedIn. In turn, Facebook's performance has far surpassed that of Groupon, despite the fact that FB has taken a substantial haircut from its IPO price.
Splashy Market Debuts Don't Guarantee Investor Profits
The first of these three next-generation companies to go public was LinkedIn, which began trading on the NYSE in May 2011. Next up was Groupon, which completed its IPO in November 2011. Facebook finally made its debut as a public company in May 2012, as the company completed the largest and most anticipated technology offering since Google's 2004 IPO.
Both Facebook and Groupon have been major disappointments, with the latter company doing a complete belly flop during its time listed on the Nasdaq. The daily deals site completed its offering at $20 per share, which valued the company at nearly $13 billion. Today, Groupon shares trade at around $8, representing a 60% discount from their IPO price.
Facebook's stock has fallen roughly 37% from its $38 initial public offering price to $24. Nevertheless, Mark Zuckerberg's company still has a healthy $58 billion market cap. Whereas Facebook and Groupon have been notable disappointments, LinkedIn has been an IPO rocket ship since its debut. In a little more than two years, the stock has surged more than 280% from its $45 offering price.
A Look at Valuation
Although the history of these three companies is interesting and provides important investment context, it offers little in the way of predictive power about the future trajectory of the stocks. Instead, it is necessary to examine current valuations to see if any of these names are compelling at current levels.
On a forward earnings basis, the most expensive is LinkedIn. The shares trade at around 82 times next year's earnings estimates compared to roughly 31 times for Facebook and a little more than 27 times for Groupon. Between fiscal 2011 and fiscal 2012, LinkedIn grew revenue by around 86%, compared to 37% for Facebook and 45% for Groupon.
Whereas Groupon has never reported an annual profit, Facebook has been profitable for the last four years and LinkedIn for the last three. What is more important, however, is the forward looking outlook and analysts anticipate all three companies will be profitable in fiscal 2013 and 2014.
A Bright Operating Horizon?
For the current year, LinkedIn's earnings per share are expected to rise 64% followed by a better than 44% estimated sequential increase in fiscal 2014. Combine this with anticipated sales growth of more than 54% in fiscal 2013 and 41% in fiscal 2014 and it is not hard to see why the stock commands such a rich valuation.
Facebook's earnings per share are expected to rise only around 7.50% in fiscal 2013 followed by an estimated increase in EPS of roughly 37% in fiscal 2014. Analysts are estimating that revenue will climb approximately 32% this year followed by a gain of 26.50% in fiscal 2014. Overall, these are solid, if not spectacular, metrics.
Groupon is expected to report an increase in adjusted EPS of almost 31% in fiscal 2013 followed by an estimated increase of more than 70% in fiscal 2014. Certainly these are impressive earnings estimates, but there are a couple of caveats in relation to Groupon.
First, despite the anticipated sharp percentage gain in adjusted EPS, analysts are only estimating earnings of $0.29 per share in 2014. The second potential problem is that revenue growth is expected to fall off a cliff. Sales are only expected to be up 9.10% this year followed by a 11.10% gain in fiscal 2014.
Valuation, Part Deux
Another useful metric in examining the relative value of these three stocks is their PEG ratios. This figure can be calculated by dividing the stock's P/E ratio using 2013 earnings estimates by the five-year expected earnings growth rate. Not surprisingly, the most expensive is LinkedIn, with a PEG ratio of 2.03. The next most expensive is Groupon, with a PEG ratio of 1.90. Facebook's PEG is relatively cheap at 1.44.
The final metric that we will consider is price/sales for these three Internet stocks. This valuation metric varies wildly between the companies. For example, due to margin concerns and slowing revenue trends, Groupon trades at just 2.22 times the company's trailing twelve month sales. This is well below Facebook, which trades at a price/sales ratio of 10.54 and LinkedIn, which trades at 17.22 times sales.
Although this metric can be misleading and difficult to accurately apply when comparing companies, it is a reflection of the market's future expectations about revenue growth and profit margins. Although taking a hard look at these three stocks' current valuations is not a surefire way of predicting future price movements, there are some conclusions that can be drawn.
What Can We Conclude?
Using the metrics presented here, the "safest" among these stocks is likely Facebook. The company's P/E and PEG ratio appear reasonable in light of Facebook's strong operating outlook, history of profitability, ubiquitous brand, and significant market share. Despite its rocky trading history, this is a stock that investors can feel relatively comfortable about as a long-term investment.
The company with the most attractive operating profile out of the three is LinkedIn. In addition to its track record of significant earnings and revenue growth, the company is expected to grow earnings by more than 58% per annum over the next five years. In comparison, Facebook's earnings are anticipated to rise around 29% per year over the next five years and Groupon's bottom line is expected to expand at a rate of a little less than 25% per year.
LinkedIn also has the distinction of having the best historical stock performance by far. Nevertheless, all of these positive factors are offset by a very rich valuation. Although this would appear to be an attractive stock, there is plenty of risk inherent in the name at 82 times next year's earnings estimates.
Groupon is defined by uncertainty and the company's time on the public markets has been rocky to say the least. Not only has the stock price plunged, but Groupon has also had to endure an accounting scandal and the unceremonious exit of its founder and CEO.
Given the company's track record and concerns about slowing revenue growth, the stock's valuation may appear to be slightly rich. Nevertheless, the future of the business is still a genuine crapshoot.
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Ryan Glosier 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!