Should You Buy Or Sell the Facebook Inc (FB) Rally?

Career-oriented social network Linkedin Corporation (NYSE:LNKD) and social gaming company Zynga Inc (NASDAQ:ZNGA) are two of Facebook’s closest peers. Facebook actually has the lowest forward P/E multiple of these three companies, with these two stocks trading at 87 and 131 times their respective forward earnings estimates. Of course, this is because all three companies are battling with profitability but current investors are piling in hoping for growth (or, as may be more likely in Zynga’s case, an acquisition). Zynga has of course plummeted from its own IPO price, and most of its market capitalization now consists of the value of its cash. LinkedIn has been reporting very strong revenue growth, and the stock is up 70% in the last year, but we think that we’d still avoid it based on valuation.

Facebook also can be compared to Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG). These large tech companies, similarly to Facebook, are dependent on finding ways to monetize consumers’ move to mobile devices (Google, of course, operates the Google Plus social network). Apple and Google were the two most popular stocks among hedge funds for the third quarter of the year (see the full rankings), and as more mature companies they have considerably lower growth rates. Google actually saw a decline in net income last quarter versus a year earlier, though that was due to its addition of Motorola Mobility Holdings. With Google’s forward P/E multiple being 15, and Apple’s being only 9, we’d think that these are better value plays.

We don’t see the current Facebook Inc (NASDAQ:FB) rally holding for much longer, based on the fundamentals. Even if we ignore share based compensation, expenses have been growing faster than revenue, and even if the company does bring that trend to a halt it will need high earnings growth to justify its current valuation. There are better value stocks elsewhere, including in technology, for investors to buy.