GOOG continues to be aggressive in new product launches and product upgrades. Earlier this month, it rolled out a new and improved Google Docs with new templates and Google Drive support. Google Play Store now has carrier billing support for entertainment and publishing. And perhaps most importantly, GOOG added social reports to Google Analytics, which enables customers to see additional details about which sites are linking to their content, which will compete with FB’s social graph. We believe GOOG is a superior investment from both a valuation and growth perspective. At IPO, FB traded at ~5.0x the TTM P/E of GOOG, and we find that unfounded. GOOG is still posting strong earnings growth numbers (25% y-o-y in the past three years) and has a lot of international growth opportunities, in particular China. GOOG has its hands full with Baidu and FB will have to go up against the established and popular Renren (see more on our Chinese Internet Gaming Picks), which will have close to 200 million users by the end of this year
We’ve written about how we share Donald Yacktman and Jeff Auxier’s bullish stance on MSFT. It too is a well-diversified company with what we believe has the potential to trade up to $40 a share and generous dividend policy. Recently it has integrated Facebook search in its Bing search engine showing a push to tackle the social media angle. MSFT has not had a whole lot of successes outside of its traditional licensing/Windows business, but given its deep pockets, we still think it’s a force to be reckoned with.
LNKD has been promoting its own business network and thus has a different advertising client base. We find LNKD overvalued though even factoring in that revenues have doubled y-o-y and that its user base has grown 58% y-o-y. We’ll be interested in seeing if it can do anything innovative with the Slideshare acquisition, the online presentation sharing platform. But we don’t see immediate monetization from that.
Do we think that FB has a lot of potential? Undoubtedly. However, we are having trouble getting comfortable with the currently valuation when competitors in the space are more reasonably valued. Let’s also not overlook GM’s (GM) pulling its $10 million account from FB before the IPO officially launched. Some argue that GM just “doesn’t get social media,” but we think this foreshadows additional challenges FB will face regarding the future of its revenue engine. GM claims FB ads didn’t deliver results. And with the sheer number of ads now on the website, that’s not hard to believe. Sure, $10 million is chump change compared to the $3.7 billion in ad revenue FB brought in last years, but FB is going to have to figure out a way to help advertisers attain the tangible results they want through a more creative or simply different approach. Mobile is another area that FB has not quite mastered. It’s billion-dollar purchase of Instagram shows holes in its strategic vision with pricey consequences, not to mention that Instagram has zero revenues and that FB mobile still loses money. As earlier stage investors cash out, there will be continued downward pressure on the share price. We would be more comfortable buying GOOG or MSFT until FB valuation comes back down to earth.
