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Facebook Vs. Groupon: Which Has a Brighter Future?

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

If you are interested in buying shares of social media companies, you have to take a look at mobile trends. Smartphones and tablets are taking over the industry--the latter's shipments, for example, have narrowed to a ratio of 1:2.5 relative PC shipments. Companies that are best capable of targeting this high-growth market are well positioned for upside; those that are falling behind it face increasingly large barriers to entry. Below, I review several companies with a stake in social media.

No Bright Future For Facebook (NASDAQ: FB)

The social network company has now risen an impressive 53.5% from the 52-week low. 21 of 30 reporting analysts call the stock a "buy" or better--a majority of which say "strong buy"--and no analyst is calling the stock a "sell". Several, in fact, have upgraded their price targets. Is this attitude justified? Facebook trades at 24.2x cash flow (industry average: 17.6x) and 8.2x book value (industry average: 5.2x). It has a 16.9% return on invested capital, which is 250 bps greater than the industry average. But its growth trends are decelerating, and social networks are largely regarded as faddish.

A lot of the recent bull run has come from an improved outlook on mobile monetization. One could argue that mobile, which Facebook has struggled to monetize, actually represents a tailwind, since social networking is built for the "always-up-to-date" attitude of smartphone users. Around half of mobile users own smartphones, and they can easily connect these Internet-enhanced devices to Facebook. But the more sensible opinion would be that smartphones will make it easier for Facebook to replace. Texting--once regarded as "unstoppable" and a "secular change"--has gone down considerably and been replaced by a variety of social media devices, including social networking, that instantly updates recipients without character limits. But its naive to think that Facebook won't face the same kind of interest erosion that AOL, texting, and, MySpace experienced. Smartphone users are very fickle, and the plethora of apps will, in my view, lead to the death of Facebook when an appropriately faddish substitute is found. In the meanwhile, Facebook will have lost billions in targeting this already hard-to-capture market.

Yes, that's right, in case you didn't catch it, I mentioned "character limits" as a large catalyst for mobile users to shift away from texting to substitutes. It's one of the more popular answers I get in my admittedly unscientific polls, but it reveals something important: mobile users are, again, very fickle and will change for just the slightest reason. As silly as it sounds, users may shift away from Facebook just because of its poor reputation on privacy policy… 

Companies have long gotten away with being "evil", despite what Google (NASDAQ: GOOG) says, but Facebook is less vulnerable by nature of being inherently based on, well, social whims. Let's be honest, we all know that avid environmentalist who protests endlessly about the Macondo oil spill but continues to fill up at the nearest BP outlet. But yet we all kind of sympathize with the environmentalists's plight: he has little alternatives. By contrast, there are thousands upon thousands of alternatives to Facebook, and new entrants emerge with effectively no barriers to entry. Instagram, which Facebook spent all of its $1 billion in net income on, has made headlines in recent weeks over the uproar related to its privacy changes. Even the most die-hard fans are upset about the proposed way the company would use content to generate ads--a problem so bad that Facebook had to revert the policy. Does it really make sense to get in now?

Is Groupon (NASDAQ: GRPN) A Good Alternative?

In my view, Groupon has more to gain from the rise in smartphones. If consumers have been using Amazon apps to swipe bar codes at grocery stores and then find more attractive prices in cyberspace, the market could benefit from greater deals that target day-to-day consumer shopping. Groupon trades more reasonably at 19.3x forward earnings, has no debt on the balance sheet, and generates an impressive free cash flow yield of 9.6%. Although Facebook has started to target eCommerce trends through the release of Gifts, it is harder to create a market without a first-mover advantage.

Groupon has started to build upon its first-mover advantage through the launch of Groupon Goods, which is an eCommerce website with special deals. Evercore recently forecasted to $2.5 billion in 2013 sales--a growth rate of 150% over 2012 sales. But the stock is now up 80% from the 52-week low after what turned out--as it appear now--to be a baseless rumor. Many believed that the Google would take them over--it previously had a takeover offer that is double the current valuation of the deal website. But sources close to the search business have recently dismissed the speculation. While it's common for executives of a company to dismiss product developments as a way to create a positive catalyst in the future, private sources have nothing to gain from this activity.

Instead, you should just buy the suitor under question. Google is the smartphone future. It is creating a high-end phone with Motorola Mobility, called the "X Phone, and this will, no doubt, build upon the company's global lead in mobile operating system. Though Android has a little under a majority of the domestic market, it controls 60% and 72.2% of the high-growth "Urban China" and Brazil markets. With leading apps under its arsenal from Google+ to YouTube and Gmail, I believe the company will succeed and outperform from the demise of Groupon and/or Facebook.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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