Facebook Should Be in the S&P 500

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There weren't too many people scratching their heads when Sears Holdings (Nasdaq: SHLD  ) got the boot from the S&P 500 last week.

After a decade of cascading comps and fading relevance at Kmart and its namesake chain, the removal essentially amounts to a mercy killing. Sure, the stock was rallying earlier this year. There are some valuable pieces in the company. Sears is also one of the original S&P 500 companies, dating to the index's original 1957 founding.

However, after 55 years, it was time for Sears Holdings and its thinning float to go.

Face the music
Facebook
(Nasdaq: FB  ) would've been a logical replacement. Don't laugh. However, that couldn't have happened right now, since the S&P 500 requires that recent IPOs get "seasoned for six to 12 months" before being tossed into the indexing stew.

So maybe next time, Facebook. Instead, the world's leading social-networking website with nearly a billion active users got passed over for a Dutch petrochemical company. No offense, LyondellBasell (NYSE: LYB  ) , but it's just a matter of time.

Facebook certainly meets most of the other S&P 500 requirements. It's very profitable. It clearly surpasses the $4 billion valuation floor. Its public float will increase, ironically enough as lockup restrictions expire.

At some point -- a few months from now -- Facebook will be S&P 500-worthy.

Don't judge a stock by its busted IPO cover
It took Google (Nasdaq: GOOG  ) nearly two years of publicly traded life to be added to the S&P 500 in 2006. The world's leading search engine had seen its stock more than quadruple at that time. It certainly wasn't an obscure dot-com, reportedly the largest company by market cap to have been added to the S&P 500 at the time.

It was a travesty that it took so long for Big G to get added, and even then it was extended the invitation only because of an oil company's buyout. Will Facebook have a shorter wait in the on-deck circle?

Yes, Facebook has seen its stock value get crushed since its May IPO. Google quadrupled on its way to its induction ceremony, while Facebook stock's been shaved in half. However, it's not as if Facebook can be blamed or penalized for the mania that led to its overpriced debut. Are we really going to blame Facebook for its original $104 billion price tag? We can't even blame greedy underwriters. It was just the simple laws of supply and demand at their frenzied worst.

All we can do is evaluate the Facebook that we have now. We're talking about a $52 billion juggernaut in terms of current market capitalization. Yes, Google was bigger when it went in, but this is still a company nearly twice as valuable as LyondellBasell.

Again, no offense LyondellBasell. It's not the only S&P 500 company looking up at Facebook. At $52 billion, Facebook is already bigger than 448 of the 500 companies in the widely tracked index

Hitting up Facebook for a friend request
But wait -- there's more. Facebook has become an IPO punch line these days, but let's look at what we have here.

Facebook wrapped up its latest quarter with $10.2 billion in cash. Quarterly revenue soared 32% to nearly $1.2 billion. Adjusted net income of $295 million implies juicy net margins of 25%.

Worrywarts arguing that nobody's using Facebook these days couldn't be more wrong. Monthly active users have shot up 29% over the past year to 955 million.

Some would argue that LinkedIn (NYSE: LNKD  ) deserves to be the poster child of social-networking websites for investors. It's the successful debutante. It's been public 12 months longer. The corporate-minded website has seen its IPO soar 165% since going public at $45. LinkedIn is also growing faster.

But let's line up the numbers. Yes, LinkedIn saw its revenue during the same three months as Facebook's most recent quarter skyrocket 89% to $228.2 million. However, LinkedIn will generate less revenue this entire year than Facebook rang up in its latest quarter. LinkedIn's adjusted net margins are still in the single digits.

Yes, LinkedIn is a great company. The argument could be made that both companies deserve to be in the S&P 500. However, the numbers don't lie. Facebook is still bigger and growing faster than most of the 500 companies already in the show.

Hit the reset button on perception
Don't let the negative four-month trajectory in Facebook's brief public tenure dissuade you. What if it had gone public two years ago at $15 billion or five years ago at $3 billion? The stock would be an investing success story. Today's growth would be rightfully applauded.

Facebook belongs in the S&P 500 once the gauge's silly seasoning process is complete. Anyone who argues otherwise is essentially arguing that the timing of an IPO is more important than the company being measured.

Really.

A world of opportunity
There's a new premium report on Facebook detailing the opportunities and challenges in store for its shareholders. The report includes a full year of updates, so time's ticking. Check it out now.

The Motley Fool owns shares of Facebook, Apple, and LinkedIn. Motley Fool newsletter services have recommended buying shares of Google, Apple, LinkedIn, and Facebook and creating a bull call spread position in Apple. 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 10, 2012, at 11:13 AM, JPatSoCal wrote:

    No, not really. Consider the following:

    1) Facebook is not being operated for the purpose of making money, by their own own admission. S&P probably wants to keep business enterprises with a strong profit motive in their index.

    2) The seasoning process makes sense. FB has been public for four months, and has seen it's market cap cut in half. In a year it could (I'm not saying it will) be cut in half two more times. At 10B capitalization, the case would be far less compelling. In general, were I S&P, I would not add a company that had been highly volatile in the past year and had no track record of 'stability'.

    Only two reasons, but if it were my index either one would make sense to me not to include it.

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