Valuation, Part Deux
Another useful metric in examining the relative value of these three stocks is their PEG ratios. This figure can be calculated by dividing the stock’s P/E ratio using 2013 earnings estimates by the five-year expected earnings growth rate. Not surprisingly, the most expensive is LinkedIn, with a PEG ratio of 2.03. The next most expensive is Groupon, with a PEG ratio of 1.90. Facebook’s PEG is relatively cheap at 1.44.
The final metric that we will consider is price/sales for these three Internet stocks. This valuation metric varies wildly between the companies. For example, due to margin concerns and slowing revenue trends, Groupon Inc (NASDAQ:GRPN) trades at just 2.22 times the company’s trailing twelve month sales. This is well below Facebook Inc (NASDAQ:FB), which trades at a price/sales ratio of 10.54 and LinkedIn Corp (NYSE:LNKD), which trades at 17.22 times sales.
Although this metric can be misleading and difficult to accurately apply when comparing companies, it is a reflection of the market’s future expectations about revenue growth and profit margins. Although taking a hard look at these three stocks’ current valuations is not a surefire way of predicting future price movements, there are some conclusions that can be drawn.
What Can We Conclude?
Using the metrics presented here, the “safest” among these stocks is likely Facebook. The company’s P/E and PEG ratio appear reasonable in light of Facebook’s strong operating outlook, history of profitability, ubiquitous brand, and significant market share. Despite its rocky trading history, this is a stock that investors can feel relatively comfortable about as a long-term investment.
The company with the most attractive operating profile out of the three is LinkedIn Corp (NYSE:LNKD). In addition to its track record of significant earnings and revenue growth, the company is expected to grow earnings by more than 58% per annum over the next five years. In comparison, Facebook’s earnings are anticipated to rise around 29% per year over the next five years and Groupon’s bottom line is expected to expand at a rate of a little less than 25% per year.
LinkedIn also has the distinction of having the best historical stock performance by far. Nevertheless, all of these positive factors are offset by a very rich valuation. Although this would appear to be an attractive stock, there is plenty of risk inherent in the name at 82 times next year’s earnings estimates.
Groupon is defined by uncertainty and the company’s time on the public markets has been rocky to say the least. Not only has the stock price plunged, but Groupon Inc (NASDAQ:GRPN) has also had to endure an accounting scandal and the unceremonious exit of its founder and CEO.
Given the company’s track record and concerns about slowing revenue growth, the stock’s valuation may appear to be slightly rich. Nevertheless, the future of the business is still a genuine crapshoot.
The article Valuation Showdown: Facebook vs. LinkedIn vs. Groupon originally appeared on Fool.com and is written by Ryan Glosier.
Ryan Glosier has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
