Is Facebook the Best Play in Social Media Today?
There's a good chance you use Facebook (NAS: FB) on a regular basis to engage with friends and family, even if you don't own shares of the social network. With 901 million monthly active users, Facebook is an advertiser's dream. The fact that it is free to use has fueled this growth. However, shares of the social network, which began trading on the Nasdaq two weeks ago, carry a steep premium compared with other companies in the industry. For now, I think there are much better plays in the social-media space outside Facebook.
Let's face it
Everything from a shocking acquisition, to the turbulent initial public offering, to concerns over the company's ability to grow revenue have contributed to the stock's price volatility. Shares are down 26% from its $38 IPO price. Unfortunately, I still think the stock is inflated at today's price of about $29 a pop.
From an investment standpoint, Facebook commands a sky-high P/E relative to industry peers like Apple (NAS: AAPL) and Google. To really drive the point home, CNBC dressed up Facebook with multiples from other tech companies to illustrate how the shares would trade at different valuations.
Facebook's price at comparable P/E ratios
FB Stock Price
|Zynga (NAS: ZNGA)||19.5||$10.55|
Sources: CNBC and S&P Capital IQ.
This is telling, especially for investors who are thinking about buying Facebook on its recent dip. This I wouldn't advise, as I think the stock has farther to fall. It's now clear that much of Facebook's valuation ahead of its offering was based on hype. The social network's IPO uh-oh included technical difficulties at the exchange, as well as a selective disclosure about earnings made by Morgan Stanley ahead of the offering -- keeping small investors out of the loop. Perhaps this wouldn't have been such a big deal had the share price held up. But Facebook isn't the only tech stock to stumble after going public.
Shares of Zynga currently trade at $5.98 a share, down from their December IPO price of $10. Groupon is in a similar boat, with its stock having lost more than 46% of its value year to date. The daily-deals site lost investor confidence earlier this year after not one, but two major accounting mishaps. All of these cases demonstrate why it's better to wait for the IPO hype to die down before jumping into a position, even if you're an avid fan of the company's products or services.
While we wait for Facebook to cool off, there are plenty of other attractive options in the social-media space. On a valuation basis, both SINA (NAS: SINA) and Renren (NAS: RENN) look like better stocks. These Chinese companies offer investors an opportunity to tap into the world's largest Internet market.
According to online database Finviz.com, Online portal SINA keeps a P/E of 15 and currently sells for about $53 a share. That's not bad for a Web-based media company that's expected to grow earnings per share next year by more than 635%. Meanwhile, the godfather of social networking in China, Renren, has a higher P/E of 45 and currently trades at $4.74 a share. While neither of these stocks is immune to the strict regulations imposed by Chinese government, both offer superior valuations to Facebook along with the promise of serious growth to come.
The future of Facebook
If you still want to own a piece of Facebook, you need to be in it for the long run. Despite the social network's turbulent start as a publicly traded company, I think over the long term this will be a very successful story. I'm hopeful that down the road Facebook can grow revenue, although the real question remains: at what cost? Mark Zuckerberg's sudden shopping splurge on Instagram should be a warning to all.
Just how low our beloved social network will go remains to be told. However, if shares tumble closer to the $20 mark, I'm buying for keeps. And maybe you're not yet ready to jump into the global social-media stocks I've recommended here. That's understandable, as some unfortunate tech investors are still recovering from money lost in Facebook's IPO. Instead, I invite you to discover a hidden social-media gem with a business model that just keeps winning. Get a free report from The Motley Fool, titled "Forget Facebook -- Here's the Tech IPO You Should Be Buying."
At the time this article was published Fool contributor Tamara Rutter owns shares of Apple and Zynga. Follow her onTwitter, where she uses the handle@TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Facebook and Apple. Motley Fool newsletter services have recommended buying shares of Apple and SINA and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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