Interested in Buying the Right Social Media Tech Stocks?

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 attention surrounding Amazon and Facebook, it is hard to make any sense out of businesses diversified in social media and technology. Must they all trade at high multiples? And, are the ones that trade at low multiples junk stocks with no future? In my view, the answer to both is a double "no." The market has exaggerating the strengths of some firms to overshadow those of others. The below analysis puts some of my views under the light for context.

Yahoo! Still Expensive…

With the recent injection of badly needed new blood, Yahoo has its moment to prove it can change. But, in my view, I am not compelled by the "this-time-it's-different" story. As it stands, Yahoo is viewed as a poor search engine compared to Google (NASDAQ: GOOG), to say nothing about it's outdated integration. Is there a Yahoo! mobile operating system? Or a Yahoo! search engine? And how is the populating for @yahoo boxes doing? These rhetorical questions alone warrant staying away format he's tock.

On a more fundamental level, however, the stock looks very expensive. At around 17x past earnings, the stock is strangely at a premium to peers. Meanwhile, I find that the forecast for 13.9% annual EPS growth over the next 5 years to be much too high, which will set the firm up for failure.

In terms of free cash flow, there is also nothing to go "yahoo!" about: the company yields very little. In my DCF model, I assume 11.5% top-line growth over the next 6 years followed by 2.5% into perpetuity (quite aggressive), consistent operating metrics, and a 10% discount rate. Based on these assumptions, I find that the fair value of the equity to be $17.76. This means Yahoo! has little to no upside and accordingly justifies holding out.

But Google & eBay (NASDAQ: EBAY) Both Undervalued

In contrast Yahoo!, Google and eBay both have strong value drivers to pull. Google has large diversification across several mediums ranging from web browsing to search engines to social media to mobile to video to email and more. eBay has excellent leverage towards the rise in plastic payment.

First, let's look at Google. The world's most popular search engine recently hit its 52-week high but still has excellent upside from here. In my DCF model, I assume 18.3% top-line growth over the next 6 years and 1.5% into perpetuity, consistent operating metrics, and a 10% discount rate. Based on these bearish assumptions, I find that the stock is around fair value. However, in reality, Google is a high-growth social tech firm that would yield something more like 2% into perpetuity at around a 9% discount rate. These assumptions alone would make Google nearly a $750 stock.

In addition, I believe the company has considerable upside from monetizing its Android mobile operating system. Considering that this OS is more popular than Apple's, and yet Google - to say nothing about the core search business - is valued at around half of Apple's valuation, it is not difficult to see the attraction. More than 250 million users have upgrade to Google+ and over 1 million Android devices are being activated each day. With a universe north of 400 million Android users, one begins to wonder what the craze was about Facebook when it hit 500 million users without any meaningful ad business. Google has yet to significantly cross-sell users but once it does multiples will start to elevate closer to Facebook's. Put differently, I truly believe the sky is the limit for Google.

Now onto eBay, which has similar upside against the comparison of Amazon. Like Facebook, Amazon's multiples are sky-high and are in complete disregard to the actual growth potential, which is not nearly enough to justify even half of the valuation at a 50% annual EPS growth over the next 5 years at a generous 20x multiple! Like Amazon, eBay offers a similar service (eCommerce). However, it's payment processing offering, PayPal, has significant room for expansion.

Fortunately, momentum is in the right direction for PayPal. The sharp rise in mobile business has been driven by greater selectivity in shopping apps on smartphones. While this is still on a very small-scale, the secular trend is heading towards mobile. PayPal will reach out to top users and likely have retailers tie usage to discounts to drive greater consumer loyalty. In the grand scheme, PayPal is exposed much more to mobile than what the market appreciates. With all the craze in eCommerce surrounding Amazon, it is thus surprising that eBay continues to trade at a discount.


TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend eBay 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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