Is Facebook the Best Play in Social Media Today?

There's a good chance you use Facebook (Nasdaq: 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 (Nasdaq: 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

Company

Forward P/E

FB Stock Price

Apple 11.7 $6.30
S&P 500 12.8 $6.90
Google 13.12 $7.15
Zynga (Nasdaq: ZNGA  ) 19.5 $10.55
LinkedIn 128.2 $128.20

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.

Better plays?
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 (Nasdaq: SINA  ) and Renren (Nasdaq: 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."

Fool contributor Tamara Rutter owns shares of Apple and Zynga. Follow her on Twitter, 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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  • Report this Comment On May 31, 2012, at 9:45 PM, coachj14 wrote:

    I do not understand why the media persists on using the "900 Million active/unique" users in every single article ever written about Facebook. That is the single most misleading and factually incorrect piece of Lie that has ever been invented.

    Facebook does not have 900 Million unique and active users. Case in point, I have three facebook accounts under different names, my neice has one for her dog, and my 5 year old daughter has one and she can't even use the computer yet [we have it for pictures to share with grandma]. I personally know of at least 30 people who have such useless and unused accounts. In fact, out of my 350 "friends", half of them have non-real accounts.

    Saying they have 900 Million users is like google saying they have a billion unique email users [their fake to real ration must be 60-70% fakes]

    I would guess that at least 30-40% of the facebook unique users are in fact not real or are redundant accounts. It may be even more. They should either be a bit more honest, or media members should stop spewing that garbage everytime they write an article.

  • Report this Comment On May 31, 2012, at 9:49 PM, jr0718 wrote:

    So, is ZNGA a better valued social media stock than FB? It looked that way from your comparision.

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