On one of last week’s CNBC Fast Moneys I fielded a viewer question asking my thoughts on Facebook (FB) shares at current level. The truth is I think very little of the shares right here because it’s basically a coin flip whether you make or lose money tomorrow, a week from now or a month from now. To think about FB as an investment one must have longer term time horizon and some conviction about the company’s relevance in the future and their ability to monetize and grow their user base. The stock’s current price more than reflects what the company has been able to achieve to date but in the case of a stock like FB trading at 35x forward earnings (85x trailing) and 10x forward sales (17x trailing), I think it is safe to say that it is mostly trading on future prospects.
This may sound obvious but this is not always the case in the stock market. Look at EBAY for example – investors are heavily discounting the company’s future prospects with the stock trading at a market multiple with forward earnings and sales growth in line with its forward PE, and trades at only 3x those expected sales. The stock, which has had double digit earnings and sales growth in every year of its existence except 2009 and 2010, trades in a raging bull market as if the smart-money knows that the jig is up and Ebay is going back into the Beanie Baby trading business.
The news today that EBAY’s former President of their Paypal unit is heading to FB to lead their messaging division is a fairly decent example of prevailing investor sentiment between these two stocks as employees, like investors, prefer the prospects of FB to that of EBAY.
While EBAY clearly represents the old guard as it relates to internet stocks not all internet 2.0 stocks are created equal. It helps to put FB’s history in some context with what I would say are the only other two pure play publicly traded social networks, LinkedIn (LNKD) and Twitter (TWTR). Before this bull cycle is all well and done we may have a fairly instructive playbook for the next internet boom. I would place the current price action in these three stocks since their recent all time highs in three categories, LNKD as horrid, TWTR as bad and FB as meh.
Meanwhile, EBAY is trading much more like a stodgy, unloved internet utility with a similar valuation to boot. The recent security scandal has done nothing to improve sentiment, and in a market on the prowl for GARP (growth at a reasonable price). EBAY is one of the very few GARP stocks that can’t seem to get any love, no matter the earnings and sales growth.
For those looking for the home run, EBAY ain’t it. And if FB fires on all cylinders perhaps it’s a double in a few years. But for those looking for a beaten up company with attractive, entrenched assets (Paypal) EBAY looks to be a much safer bet. Even if the long-term opportunity might be more subdued. We have had decent success in playing for EBAY upside over the past year, and the stock is approaching levels where we might give it another shot, even though the current news cycle stinks and even Carl Icahn wasn’t able to get investors excited.