Google Vs. Facebook: Which Stock To Buy?
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I used to be a denier of the secular shift towards smartphones. While I still believe that desktop PCs aren't going away any time soon, it has become increasingly clear that smartphone exclusivity in the mobile world is inevitable. This transition will provide a tectonic change for search engines and social networks. In this article, I consider the opportunities and future of Google and Facebook.
Why You Should Buy Google (NASDAQ: GOOG)
Google is a highly integrated Internet company with its fingers in everything from search to mobile to email, video tubes, and more. Even still, a huge proportion of Google’s income comes from advertising revenues. As a result of partnerships and acquisitions, Google has been able to provide several devices such as the Nexus series, the Android mobile operating system, and possibly even its own phone--although if the "X Phone" is anything like the "Chromebook"--infamously dubbed "Chromebrick"--the fallback could be pretty big this time around. After all, much of the upside forecasted in Google has to do with its future in mobile through Android, and should it fail to deliver like Microsoft (NASDAQ: MSFT) has, it could end the momentum that the search giant has delivered for years.
Microsoft has tried numerous times to move away from its core PC operating system market. The shift into mobile, email, search, and tablets has been, frankly, embarrassing. Surface sales have been weak, email use has been eclipsed by Gmail, and Bing has actually cannibalized partnership revenue from Yahoo! But investors have largely forecasted this into the stock price. The stock is now near its 52-week low and only trades at 8.4x forward earnings with a 3.4% dividend yield. I encourage buying into this dip to capitalize on a market correction. At the end of the day, if nothing else, Microsoft provides a sustainable stream of free cash flow, and it's not going away any time soon--certainly not in less than 9 year.
The company has plenty of capital to secure strong footholds in new tech markets by leveraging existing products, such as YouTube and, of course, Google Search. Though the company’s annual growth rate has reduced, it continues to expand. In 2012, the company had a 14% growth compared to 2011. The android mobile operating system market share is increasing at an incredible rate. It current commands 75% of the mobile market. Its growth rate is doubles that of the entire smartphone industry. Google+ is a recently introduced social networking site, which is growing fast and has more than 400 million users globally. I believe the site could eventually overtake Facebook as social network users begin to look more for a "one-stop shop", where they can get their email and send texts.
In January this year, Google started offering free WiFi network in Chelsea. Two thirds of the cost of construction and annual maintenance of the WiFi network will be covered by Google while the rest will be covered by the Chelsea Improvement Company. The move is seen as a strategy of improving public relations. The company continues to lead in online ads, search and mobile ads. In fact, it has recently overtaken Facebook in mobile advertising.
Facebook (NASDAQ: FB): The Good & Bad
Facebook is still currently the undisputed leading social network site in the world. It has more than 1 billion users globally. Facebook’s future business looks bright considering that smartphones and tablets are becoming increasingly popular. Unlike some time back when most people had to wait until they got to a computer to update their status, smartphones and tablets have increased the time that people can be online. This means that social networking will continue to be popular. Due to the large number of subscribers (about 1 billion), Facebook is seen as an ideal platform for advertising. Advertisers are willing to advertise where they feel that more people will be reached.
Even if Facebook decides to charge competitive prices, it will still attract more advertisers. According to the bulls, though there are emerging competitors, such as Google+, Twitter, and LinkedIn, Facebook has the competitive advantage over the others, because it has many followers who are not willing to switch. Facebook also has a strong balance sheet with $10.19 billion in cash. In my view, however, the company has become desperate for monetization. The recent PR embarrassment over the company releasing a beta mode for charging users cash to send messages to strangers is particularly eye-opening. I actually never had a problem with the company's privacy policies, but this strikes me as a bit excessive. From what I gather, it's like paying Gmail to guarantee that your next email doesn't land in a stranger's "Spam" box. If the company has to go this low to monetize the business, what does that say about the future?
Further, Mark Zuckerberg has unparalleled voting power in the company. To realize growth, Facebook has to find ways of monetize the 1 billion users as well as increasing monthly active users. And with each earnings call, the hype will die unless something big happens. Could fees for channeling "spam" into inboxes be the only "big" thing that is in store? I hope not.
TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook, Google, and Microsoft. 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.