Facebook needs little explanation from me. It has become the preferred method of communication for much of society, with many people spending several hours a day on its service. But as an investment it lost favor early when its initial offer price was cut in half by a skeptical market. It is a little early in the Facebook story to judge its merit using a conventional valuation. Like Google, which started out with no income but lots of users, Facebook Inc (NASDAQ:FB)’s future rests on its ability to keep and grow its user base and somehow turn it into cash.
Early signs are good. Skeptics point to early competitors like MySpace that went from market leaders to nothing, but Facebook has already grown to such a size that it would be difficult to imagine a rival service gaining enough traction to compete with it. Google’s turnover is currently ten times more than that of Facebook Inc (NASDAQ:FB). Because Facebook Inc (NASDAQ:FB) has more in depth data on its user base, fans would argue that it should be able to find more ways to profit from this and eventually match and possibly beat Google’s sales. If it can achieve the same 20% margin and trade at a P/E in the low 20s we would expect the current share price of around $25 to rise to $100 – a four-bagger.
All of this depends on Zuckerberg’s ability to keep users. Recent rumours about Facebook Inc (NASDAQ:FB) introducing auto-play video ads have been worrying for some who speculate that this may provide short term revenue, but drive away users in the long term. The future is uncertain for Facebook Inc (NASDAQ:FB), but as a disruptive top dog with a visionary CEO it has all the hallmarks of a potential big winner. Personally, I have taken a limited stake in the company that I may add to as the story unfolds.
Another player in the social market space, LinkedIn, targets a different market. Whereas Facebook is for social use, LinkedIn is for professionals interested in business and careers. LinkedIn Corp (NYSE:LNKD)’s revenue model is far more developed than Facebook’s. Because it has access to a wide base of detailed information on a huge number of business professionals, it can provide valuable information and access to candidates for businesses looking to recruit. It is disrupting the market in a big way – not only stealing business from online services like Monster, but muscling in on traditional recruitment agencies.
LinkedIn Corp (NYSE:LNKD) has been showing impressive revenue growth lately; 2010 revenue was $243 million, 2011 revenue was $522 million, and 2012 revenue was $972 million). But this barely scratches the surface of a worldwide recruitment market estimated at $369 billion. It also has the opportunity to add to its services and widen its revenue stream. The current P/E of 920 may look insanely high, but it is easy to imagine revenue growing to $10 billion within a few years. At a margin of 20%, this gives a $2 billion profit. A P/E of 20 would translate to a market capitalization of $40 billion, just over double the current market cap, suggesting a rise in share price from the current $175 to $366. And this could be just the start of a long term growth story. It is a personal favorite of mine and my largest holding.
Looking for a disruptor? How about a company looking to replace conventional, combustion-engine cars with vehicles running on batteries? Tesla is the top dog in the world of electric vehicles.
But does Tesla Motors Inc (NASDAQ:TSLA) have a visionary CEO? You bet. As well as revolutionizing the automotive industry, Elon Musk is a founder of PayPal, SpaceX and Solar City. And by the way, his ambition is to die on Mars (but, as he says, not on impact).
If Tesla Motors Inc (NASDAQ:TSLA) meets expected production targets of 20,000 units in 2013 (and so far it is on target to do so), this would equate to sales of $1.7 billion at an average selling price of $85,000. Musk estimates world demand for the Model S at about 40,000 vehicles per year. If we assume that the company reaches that production target in 2014 it would result in $3.4 billion for model S sales. The Model X will come on line shortly after adding similar revenues, and after that the ‘Gen III’ mass market car, which at $35,000 selling 100,000 units would add another $3.5 billion, creating total revenue somewhere in the region of $10 billion. At a net margin of 10% and a P/E of 10 this would give Tesla Motors Inc (NASDAQ:TSLA) a market cap of $10 billion, or a share price of around $81, as compared to $45 at the time of writing.
If you are lucky enough to live in the land of the free and the home of the brave, you can trade these wonderful companies without exchange anxiety.
That’s why I want to invest like a Yank.
The article Investing Like a Yank originally appeared on Fool.com and is written by Ian Richards.
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