Facebook Inc (FB): Fad or Bargain?

Zynga

Speaking of Zynga, let’s take a quick look at this company, which has plunged from its IPO price of $10 to the current level of around $3. A lot of investors question the long-term profitability of Zynga, but I’m not so sure. Zynga Inc (NASDAQ:ZNGA) has taken steps to cut its expenses and also plans to expand its business to areas like online gambling and licensed board games. With a market cap of just $2.5 billion, Zynga needs to just get a little more efficient in its operations. The revenues are definitely there, at almost $1.3 billion in 2012. They just need to figure out how to get some profit out of their existing revenues stream and this could move sharply to the upside.

Valuation and Growth

At 44.5 times forward earnings, a traditional P/E analysis isn’t too effective here. Consensus estimates call for a 40% average annual earnings growth rate for the next three years, so I prefer to think of Facebook Inc (NASDAQ:FB)’s valuation as 16.5 times 2016’s earnings, which puts things in a much clearer perspective. Also, with $8 billion in net cash already, I would imagine this stockpile will increase with the company’s earnings going forward.

Alternatives in Social Networking

The other major publicly traded social networking company is LinkedIn Corp (NYSE:LNKD), which unlike Facebook, has been on a tear the last few months, and is now sitting at an all-time high. Although the company is barely profitable at this point, earnings are expected to grow nicely over the next few years; however the company still trades at a premium to Facebook at 58 times the projected earnings of three years from now.  Facebook Inc (NASDAQ:FB) has built up a better cash position, and has done a better job of turning its revenue growth into earnings, which were 53 cents per share last year, as opposed to just 19 cents per share for LinkedIn, despite the fact that LinkedIn trades for about 7 times the share price of Facebook.

Conclusion

My personal opinion is that LinkedIn Corp (NYSE:LNKD) is far too speculative and that Facebook has a much higher probability of success in the long run due to the mass appeal of its product. If the company can deliver on the projections, the current price looks like a very good entry point indeed.

The article Facebook: Fad or Bargain? originally appeared on Fool.com and is written by Matthew Frankel.

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