How to Play Dying Facebook Craze: Buy Google, Hold Yahoo!
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With all of the bearish chatter surrounding Facebook (NASDAQ: FB), it should not be surprising that Google (NASDAQ: GOOG) has appreciated by 13.3% since the social network's IPO. If anything, the shareholder reaction should have been more favorable towards Google. In my view, Facebook's fall, much like Netflix', is the market's realization that the business model is unsustainable.
In a brilliant move of subtle mockery, Google launched Google+. The offering is actually much better than Facebook, since it (1) gracefully allows for posts to be submitted to certain groups of people, (2) integrates comments in search engine results, (3) adds in YouTube functionality, (4) introduces an innovate live chat feature, (5) connects social networking to emailing, (6) places the +1 (Google's equivalent of "like") to Android apps, and so on, and so on- you get the point. Google is tremendously diversified throughout its mediums and thus well positioned to gain when Facebook falls.
Now about that "mockery" part. Well, as much as Google+ is a good product in and of itself, it also dismisses the current state of social networking. Billionaire founder Sergey Brin has expressed numerous times how he doesn't get the day-to-day posting of Facebook users… a sentiment all of us - Facebook users and non-Facebook users - could probably understand. Do you really need to share what you just ate for breakfast to your high school classmate? Do you really want that kind of information floating around on the Internet? The truth is… Facebook is a fad. It's hot one second and cold the next. Ironically, Facebook started as a "hot" or "not" review site of college classmates. If the same game were to be played against the social networking giant, it may find itself in the inconvenient latter category.
Google+ does not try to be something it's not. It positions itself as an auxiliary feature of a powerful and necessary search engine. Website are ephemeral and just like how users of all sorts of email boxes and instant messaging platforms moved to Gmail, they will do the same for Google+. Social networking is an "extra" and is not an extension of our life as much as Facebook likes to pretend it years. A decade into the future, and people will not be saying "like me Facebook" or "let's go play Angry Birds on Facebook." It's humorous because it's true. And what's true is often sad.
Thus, Google is definitely a "buy" off of this dying Facebook optimism. What about Yahoo! (NASDAQ: YHOO). The "search engine" company hasn't exactly gone anywhere. After booting its CEO off a resume scandal, a product developer at Google has been brought in to take the lead. It's ultimately a superficial change in my opinion - the business is outdated.
Yahoo! trades at a respective 17x and 12.9x past and forward earnings. EPS forecasts for 13.9% annual growth over the next 5 years set the bar too high. Should the exit multiple decline in the years ahead or growth fall short, the stock will take a hit. The chances of either one of these being pronounced is more likely than the exit multiple rising and growth forecasts being met or exceeded. ROA, ROE, and ROI are all in the single-digits and do not merit an unusually high multiple. Accordingly, I recommend only a "hold".
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services recommend Facebook, Google, and Yahoo!. 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.