Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
U.S. stocks managed to post decent gains on Thursday, as the benchmark S&P 500 index rose 1.1%, while the narrower Dow Jones Industrial Average (^DJI 0.56%) was up 0.7%. On the back of well-received earnings reports, high-profile growth names Facebook (FB +0.22%) and Under Armour posted stellar gains of 14.1% and 22.9%, respectively, while Chipotle looks set to do the same tomorrow, if the after-hours session is any indication. However, one iconic growth stock, Amazon.com, disappointed investors with it fourth-quarter results, which it announced after the market closed.
Facebook made quite an impression with the fourth-quarter results it announced after yesterday's market close, and investors' response today was one of unmitigated delight, as shares rose 14.1% on Thursday. One of the business milestones that encouraged investors: In the fourth quarter, mobile ad revenue became the dominant component in total ad revenues, at 53%, confirming the company's successful transition to mobile.
However, with today's gain, the stock has achieved a milestone of its own, yielding a company market value that exceeds $150 billion for the first time since its May 2012 IPO. By my reckoning, Google (GOOG 0.41%), which I consider to be Facebook's closest comparable (with the possible exception of Twitter, which lacks Facebook's ubiquity), achieved that milestone back on Nov. 15, 2006, when the shares closed at $491.93.
On that day, Google was valued at 67 times its trailing normalized earnings per share, with an enterprise value of 44 times trailing EBITDA (earnings before interest, taxes, depreciation and amortization – a crude measure of cash flow.)
As of today's market close, Facebook is valued at 89 times its trailing normalized earnings per share and sports an enterprise value-to-EBITDA multiple of 38.
At the end of 2006, Google was wrapping up a year in which it would post 73% revenue growth, and an EBIT margin of 33.5%. Last year, Facebook's revenue grew 55% and its EBIT margin was 35.6%.
In other words, at a cursory glance, Facebook and Google look quite comparable across these two periods, both in terms of company valuation and operating performance. How did Google's shareholders make out during the ensuing seven years?
During the seven year-plus period since it crossed the $150 billon value threshold, Google has soundly beaten the S&P 500 with a 12.3% annualized return against 3.5% for the benchmark index, excluding dividends. (In case you're wondering, the Nasdaq index has returned 7.5%, annualized during the same period.)
Here's how I think about the numbers I've presented. Google has executed wonderfully well during the past seven years, and I don't hear anyone arguing that the shares are significantly undervalued today. As such, I think that Facebook emulating Google's performance -- both in terms of business and share price performance -- corresponds to an optimistic scenario.
It could certainly come to pass -- Facebook has gone from strength to strength during the past year -- but seven years is a long time and a lot can happen in this area during that period. In that context, I'd be targeting a higher return than 12%, given the level of risk involved. Facebook is turning into an exceptional business, but the shares currently look too rich for my blood. Investors with a higher tolerance for risk -- or a differing opinion regarding the company's potential -- may feel differently. See you in seven years' time to find out who was right.
