Amazon.com (AMZN 0.89%) and Facebook (FB 3.83%) are now $500 billion behemoths. They are the undisputed kings of their respective industries. And as these companies have risen to power, they've earned a fortune for their investors along the way.
But which is the better buy today? Let's find out.
Image source: Getty Images.
Moat
Few businesses possess competitive advantages as powerful as Amazon.com. The e-commerce juggernaut strives to be "earth's most customer-centric company," and I'd argue that it's been largely successful in that regard. Amazon offers shoppers a value proposition -- based upon a wide selection of goods, convenient online shopping experience, low prices, and top-ranked customer service -- that its competitors find difficult to match.
Incredibly, Amazon also excels in another massive industry: cloud computing. Amazon Web Services is the leader in this rapidly growing arena, and its scale advantages provide it with a powerful edge over its competitors.
Like Amazon, Facebook dominates its industry. The social media giant's more than 2 billion users dwarf that of its rivals. Facebook benefits from powerful network effects; each new user that joins its platform makes Facebook more valuable for existing users. Additionally, the personal information its users freely share is a treasure trove for marketers, as Facebook's data allows them to target their advertisements better than perhaps any other ad platform.
Both Amazon and Facebook have wide economic moats, but with Amazon having a strong leadership position in not one but two highly valuable markets, I'll give it the edge, here.
Advantage: Amazon
Financial fortitude
Amazon and Facebook are both elite businesses, but let's take a look at some key metrics to see how they stack up in regards to financial strength.
|
Metric |
Amazon |
|
|---|---|---|
|
Revenue |
$161.2 billion |
$33.2 billion |
|
Net income |
$1.9 billion |
$13.1 billion |
|
$14.0 billion |
$18.1 billion | |
|
Operating cash flow |
$16.2 billion |
$19.4 billion |
|
$7.2 billion |
$14.3 billion | |
|
Cash |
$24.3 billion |
$35.5 billion |
|
Debt |
$24.7 billion |
N/A |
DATA SOURCE: MORNINGSTAR.
Amazon's net income and free cash flow are currently being depressed by the heavy investments it's making in content, technology, and infrastructure. Still, Facebook is a far more profitable business, with an operating margin of more than 45%, compared to less than 5% historically for Amazon. Moreover, Facebook possesses a fortress-like balance sheet with $35 billion in cash and no debt, while Amazon's debt (nearly $25 billion) currently exceeds its cash reserves. These factors give Facebook the edge in terms of financial strength.
Advantage: Facebook
Valuation
No better-buy discussion should take place without a look at valuation. Let's check out some key value metrics for Amazon and Facebook, including price-to-sales, price-to-earnings, and price-to-free-cash-flow ratios.
|
Metric |
Amazon |
|
|---|---|---|
|
P/S |
3.35 |
15.79 |
|
Trailing P/E |
280.14 |
39.79 |
|
Forward P/E |
138.51 |
26.81 |
|
P/FCF |
74.14 |
36.52 |
DATA SOURCES: YAHOO! FINANCE, MORNINGSTAR.
On three out of these four metrics, Facebook's shares are far less expensive than Amazon's. And the one metric, price to sales, that seemingly favors Amazon can be explained by the fact that investors are willing to pay significantly more per dollar of sales for Facebook due to its superior profit margins.
Even if we factor in Amazon's significantly higher expected earnings growth, Facebook's stock is still more attractively priced. Wall Street expects Amazon to increase its EPS at an annualized rate of about 57% over the next five years, compared to 28% for Facebook. That gives Amazon a price-to-earnings-to-growth ratio, or PEG, of 4.58, versus only 1.20 for Facebook.
Based on these metrics, Facebook is the bigger bargain.
Advantage: Facebook
The better buy is...
With competitive advantages that rival Amazon's, greater financial strength, and a more attractively priced stock, Facebook is the better buy today.
