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Better Buy: LinkedIn Corporation vs. Facebook

By Daniel Sparks - May 26, 2016 at 6:01PM

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Is either stock a better buy after their better-than-expected first-quarter reports?

In April, I compared LinkedIn (LNKD.DL) and Facebook (FB 1.39%) stocks about a week before they reported their first-quarter results. At the time, LinkedIn stock looked like the better value. But with some new information from their first-quarter results, does LinkedIn still look like the better stock?

Let's compare the two social network stocks head-to-head.

Metric

Facebook

LinkedIn

Trailing-12-month revenue growth (YOY)

46%

35%

First-quarter revenue growth (YOY)

52%

35%

Price-to-sales

17

5.4

Growth

Growth continues to be Facebook's strong point. Not only did its first-quarter revenue exceed expectations, but its year-over-year revenue growth rate of 52% in its most recent quarter accelerated again, giving the company four quarters in a row of accelerating revenue growth. Also, Facebook's net income, EPS, and non-GAAP EPS continued to rise rapidly -- up 194%, 188%, and 83%, respectively.

Furthermore, Facebook continues to grow its user base at impressive rates. The social network's monthly active users increased 4% sequentially -- higher than its 3% sequential jump in monthly active users in Q4.

Image source: LinkedIn.

What about LinkedIn? While its decelerating revenue growth has been a concern since the company reported worse-than-expected guidance for the full year in February, the company certainly delivered on this front for Q1. LinkedIn's first-quarter revenue of $861 million represented 35% year-over-year revenue growth and was significantly higher than analyst expectations for revenue of approximately $828 million. Similarly, LinkedIn posted better-than-expected non-GAAP EPS growth, reporting non-GAAP EPS of $0.74 -- up from $0.57 in the year-ago quarter and well above analyst estimates for about $0.60.

Looking forward, however, LinkedIn's full-year guidance for $3.65 billion to $3.7 billion in revenue still bakes in a significant deceleration of full-year revenue growth. So, investors shouldn't expect the company to be able to sustain its trailing-12-month revenue growth rate of 35% as the year goes on.

Like Facebook, user growth was also a strong point for LinkedIn. Unique visitors and member page views both increased sharply.

Valuation

Changes in the two companies' sales and stock prices have slightly altered these two social network companies' valuations. Following first-quarter reports in which both reported better-than-expected growth, their stock prices moved higher. LinkedIn stock is up about 9% and Facebook is up about 6% since I evaluated their prospects on April 20.

LinkedIn now trades at a price-to-sales ratio of 5.4. This compares to a price-to-sales ratio of 5.1 in April. Interestingly, Facebook now trades at a lower price-to-sales ratio than it was in April despite its higher stock price. This is because its trailing-12-month revenue increased at a faster rate than its stock price. Facebook now trades at a price-to-sales ratio of 17. This compares to a price-to-sales ratio of 17.8 in May.

So, which stock is a better buy? Maybe I'm a bit bipolar, but now Facebook is looking like a better buy to me. The company's ability to consistently outperform expectations, along with its ongoing streak of accelerating growth, has me rethinking the company's long-term potential. Still, though I think there is more value in Facebook stock, I continue to shy away from its pricey valuation, which has already baked in an incredibly rosy future. Of course, it's this very conservatism that has led to me missing the stock's 212% gain since its IPO.

My humble -- and probably flawed -- opinion, therefore, is that even though Facebook looks like the better buy, investors may want to leave these pricey stocks on their watchlist, hoping for a better entry point in the future.

On the other hand, I certainly wouldn't be selling any of these companies if they were already in my portfolio after such an excellent first quarter.

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Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
FB
$196.23 (1.39%) $2.69
LinkedIn Corporation Stock Quote
LinkedIn Corporation
LNKD.DL

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