3 Reasons Facebook Isn't Google

Superficially, there are some similarities between Facebook (Nasdaq: FB  ) and Google (Nasdaq: GOOG  ) . There's no doubt that last Friday's extravaganza was the most highly anticipated IPO since the search company sold shares to the public in August 2004. Perhaps investors now buying Facebook shares expect to reap the same returns that early investors in Google did. If they do, they're using the wrong blueprint -- there are fundamental differences between the two companies (and the two stocks) that mean Facebook investors will never achieve comparable success. Here are just three of those reasons.

Facebook's growth is appreciably slower than Google's was
The following bar chart shows the annual revenues of Facebook (red) and Google (blue) side by side. I've chosen different start years -- 2000 for Google and 2007 for Facebook -- to match them up at comparable periods in their development. The vertical axis is on a logarithmic scale, and the unit is billions of dollars.  

Sources: Facebook filings, S&P Capital IQ.

Clearly, Google was growing much faster than Facebook when it achieved similar revenues in Year 5. The trend suggests that in Year 5 (representing 2011 for Facebook and 2004 for Google), Google is just about to overtake Facebook. Sure enough, during the following quarter, Google's revenues were $1.35 billion (Q1 2005), substantially more than Facebook's $1.06 billion (Q1 2012).

Facebook shares are more expensive than Google's were
Back in 2005, on the day Google announced its first-quarter results, the shares closed at a price-to-earnings (P/E) ratio of 80.7 on the basis of trailing-12-month earnings. Interestingly, if Facebook shares were now trading at the bottom of the IPO pricing range ($34), their P/E ratio would be almost identical, at 79.1.

On that assumption, then, the two companies would sport similar valuations at a similar point in their growth path. Here's a rough conclusion I draw from that observation: Assuming Facebook were a $34 stock, your absolute best-case "shoot-the-lights-out" scenario would be to earn the same return over the next seven years that Google was able to produce over the past seven years -- a tripling of the stock price.

That might sound great, but let me be clear: First, a $34 buy-in price is not on the table right now. Based on current prices, the scenarios that are most likely range from pedestrian returns to a catastrophic destruction of wealth (something on the order of a 40% to 80% loss over the next five to seven years.) With all due respect to my Foolish colleague Rick Munarriz, there is no chance that Facebook is actually cheap. None. Second, reproducing Google's operating results is closer to a pipe dream than a best-case scenario: Facebook can only dream of being Google when it grows up.

Here's why.

Facebook dominates a trend, not an industry
Think about it. Google created a business that it continues to dominate to this day: paid search. Facebook, meanwhile, is arguably the dominant social-networking website (although Twitter might have something to say about that). Sure, social networking is not a fad -- people who say it is aren't paying attention -- but neither is it a business model.

Saying that Facebook will be a great investment because it is the dominant participant in a huge technological trend is fundamentally the same argument that was made in 1998, according to which Web-based businesses will succeed because the Internet is having a profound impact on businesses and consumers. For every, there are many, many,, or Ariba examples, and even Amazon didn't prove to be a great investment at any price.

Today's reality for Facebook is a business model that is no different from displaying banner ads. Is there potential value in 900-plus-million users? Of course, but right now it is nothing more than that -- potential. Facebook's efforts to monetize its user base in ways that create genuine, significant value for companies is untested, particularly as users migrate to Facebook's mobile application. Even Facebook executives admit that.

However, that (highly uncertain) potential embedded is now changing hands at certainty-level prices. Let me state this unambiguously: The vast majority of Facebook's market value can only be attributed to highly uncertain potential profits that have a high probability of failing to materialize, if not altogether at least not on the scale that is embedded in the current price.

It's a slam dunk ... to avoid this stock
In Facebook, we have a business that is much less predictable than Google's and is growing more slowly than Google was at the same stage and with its largest growth opportunities untested -- yet the shares are priced more expensively than Google's were. Google made good on its early potential, and it rewarded investors in the process. For Facebook, a track record of flawless execution is something it will need to establish -- once it has figured out what business it is in -- if it can even come close to justifying today's share price. At what price is Facebook a good bet? A prudent speculator would require a wide discount to even the bottom of the IPO's pricing range.

Instead of following the "dumb money" into Facebook, there's another outstanding opportunity in the social-networking game. In fact, our senior technology analyst thinks this stock's potential could even exceed that of Facebook. To find out which social-networking stock you need to know about, access our research report.

Fool contributor Alex Dumortier holds no position in any company mentioned; you can follow him on Twitter. Check out his holdings and a short bio. The Motley Fool owns shares of Google and Motley Fool newsletter services have recommended buying shares of Google and 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 insightsmakes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Comments from our Foolish Readers

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  • Report this Comment On May 20, 2012, at 6:53 PM, harvest2 wrote:

    units in billions? that would put google sales at 60 trillion. you ment millions right?

  • Report this Comment On May 20, 2012, at 7:03 PM, TMFNewCow wrote:

    Pretty sure you mean the unit in the chart is *m*illions instead of *b*illions. I don't think GOOG is up to $10 trillion in revenue quite yet.

    -- Evan

  • Report this Comment On May 21, 2012, at 12:08 PM, TMFAleph1 wrote:

    Well spotted! I will request the correction immediately.

  • Report this Comment On May 21, 2012, at 12:39 PM, buynholdisdead wrote:

    I think what people are missing is the like button. A coworker was on facebook and I asked him if he received alot of ads. He said he just closed them whenever he received them and didnt pay any attention to them. I then asked him what that was on the right side of his browser and he said oh that was all the things he liked. Craftsman tools, Motorcycles, Cars, etc. and whenever they had a sale they would let him know. He said it was great because he received great deals by liking companies that he dealt with.

    Now tell me isnt that great. He is receiving ads and doesnt even know it. That told me alot about this company and how the are integrating ads to their customers.

  • Report this Comment On May 21, 2012, at 1:58 PM, pondee619 wrote:

    What is Facebook doing on the Nasdaq with a two symbol ticker? Shouldn't it be 4?

  • Report this Comment On May 21, 2012, at 2:24 PM, TMFAleph1 wrote:


    You're right, but what Facebook wants, Facebook gets...

  • Report this Comment On May 21, 2012, at 8:54 PM, MHedgeFundTrader wrote:

    This had to be one of the greatest change of life weekends in human history, endured by one Mark Zuckerberg. On Friday, he earned $9.2 billion with the flawed Facebook (FB) flotation. On Saturday, he married a Chinese doctor and longtime girlfriend, Pricilla Chan. Then on Monday, oops honey, I lost $1.2 billion. Talk about a rocky start! Never mind that the precise timing was intended to undercut any future divorce claims, hence no prenuptial. Her cost basis is $38 a share, his is zero.

    I knew that when the stock closed pennies above the $38 syndicate bid on Friday that there would be a Monday MORNING massacre. I warned away people from this issue at every opportunity. When Wall Street starts drinking its own Kool-Aid you, can count on a mass murder to follow.

    Brokers we urging clients to apply for 100 times the shares they really wanted in the expectation that that would get only 1% of their request. That paved the way for the ugliest broker confirm of the year, that you received the entire allocation that of Facebook shares that you applied for, and they were now down 13%.

    By Monday, some hapless investors still had not received notice of the allocation. At least they are faring better than the suckers lured into the aftermarket to buy stock at $43, now down 30%. Think of the entire flotation as a full employment act for the legal profession.

    There was enough mud on lead underwriter, Morgan Stanley’s face to fill Yankee Stadium. It is sad to see how low the standards and competence have fallen at this once great firm. I am now seriously thinking of taking this sullied name off of my resume, even though it is an ancient entry. Don’t worry, they’ll get their just punishment. The losses on their Facebook Stabilization fund is thought to be as high as $100 million, wiping out any underwriting fees earned. Expect investors to defriend (MS) post haste. What was expected to be the biggest payday of the year for Wall Street turned out to become the largest bill due.

    I made a killing on Facebook, not through any direct participation, but from the market timing it clarified. When the (FB) was down $5, the Dow should have been off 300. They fact that it wasn’t flashed a huge “BUY” signal to me, enough to cause me to rush to cover all of my profitable shorts and flip my model trading portfolio from a big “RISK OFF” stance to a moderate “RISK ON”. So far, it’s working, with Apple (AAPL) up $25 since my call, and (IWM) rocketing two full points.

    The Mad Hedge Fund Trader

  • Report this Comment On May 21, 2012, at 10:19 PM, lowmaple wrote:

    pondee Nasdaq just about had to get on it's hands and knees to get FB instead of NYSE

  • Report this Comment On May 21, 2012, at 10:30 PM, gas69000A wrote:

    I just got fb And kickin ass What. Due you think I should doubt sell hold I have 1500000 shareS and tfeu said there is only 30 investers in that stock???

  • Report this Comment On May 21, 2012, at 10:54 PM, JadedFoolalex wrote:

    Does anyone here know how to spell????

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