Don't Count Google+ out Despite Analyst Love for Facebook

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 looking to invest in tech, I recommend being willing to accept the fact that the market is more likely to go the opposite way you believe it should go. Few industries are as susceptible to emotion as is technology. Below, I provide a long-term vision on Google and Facebook (NASDAQ: FB) despite how volatile the short-term can be. 

Google (NASDAQ: GOOG)

It's no secret that Google has performed well for several years, and I would attribute this to proper timing in product launches and the ability to successfully convert traffic into revenue. Not long ago Google ventured into social networking when it introduced Google+, its social networking site. Since its launch, the site has seen the number of users increase rapidly, and it now ranks second in social networking activity behind Facebook. While many have likened Google+ to "a virtual ghost town," a point even I can attest to in light of the company constantly trying to connect me with new friends, I believe this will change when Facebook is seen as a fad. The amount of active users has declined in the United States and United Kingdom--two key geographies--over the last twelve months by around 2%. In my view, this is a good indication that the Facebook fad is indeed dying. By the close of last year, Google+ had 343 million active users.

Further, Google is considered to better at converting traffic into revenue compared to Facebook. Due to the growing popularity of Google+, advertisers ranked the site in the top five marketing sites category behind Twitter and Facebook.

Readers may be surprised that I am focusing this article on Google+ when there is simply so much to talk about with Google. The reason why I am emphasizing it is because I believe it reveals something behind behavioral economics. Not too long ago, the Apple bulls were adamant that no one would replace iOS as the go-to mobile operating system. And few would expect that Google would take its place. Well, Google now has a commanding lead in the mobile operating space through Android--it just needs to work on monetizing it. With plans to release the X Phone, the company is looking like it is just about to do that. If it can integrate Google+ successfully into the X Phone, it is very likely to get customers to shift away from social networking. Mobile users can be very fickle in the sense that they use apps based on newly-accepted concepts of "convenience." Just like how texting used to be popular, the introduction of new apps changed that. And Google can change it yet again, especially if it has joint control through a mobile operating system, a phone, and a strong package that includes Gmail, YouTube, and, yes, Google+.

Facebook

According to the fourth quarter earnings report by fFcebook, the average number of everyday mobile users grew by 25%. Despite this encouraging growth, Facebook reported that quarterly profits declined by the double-digits--a point I'm surprised more analysts aren't pointing out. They attributed this decline to tax expenses and compensation, but this is just obfuscation for a fact that I made earlier: The underlying business is eroding from competition. Competitive pressures perhaps can be best seen in how Facebook's margins reduced by a whopping 15 percentage points--from 48% in the previous year to 33%.

Analysts had mixed reactions and posted different ratings for Facebook following the announcement. Jefferies, for example, recommended a “hold” and cited the increased expenses as a cause for concern. The 82% increase in expenses resulted from funding several investment plans, as well as increased hiring. Jefferies analysts nevertheless were upbeat and explained that Facebook’s investment plan will yield benefits in the long run. But, pray tell, is there a "long run" game plan in store for social networking? Please give me your crystal ball if you have an idea on where Facebook will be a few years down the road.

No matter, Cantor Fitzgerald analysts maintained that Facebook is a “buy” and raised its price target to $35, up from $33. The company said this despite raising the company's 2013 expenses from $3.7 billion to $4.2 billion.

Conclusion

Google and Facebook both carry impressive economic moats. However, Google is priced much more reasonably at 14.9x forward earnings and may still very well do everything that Facebook can do in the next few years. Does that entitle it to a $67.5 billion market cap surge? In my view, it does not. An interesting investment to make alongside Google would be AOL (NYSE: AOL). AOL has risen 33.5% year to date and more than doubled in the last 12 months. It has tremendous value as an online media distributor. And at 11x price to free cash flow and no debt, I also see the company as a potential takeover target. It is only worth $3.3 billion, so a competitor like Google or Facebook could easily jump in and complement their existing operations.


TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.

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