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Facebook Vs. Google Says We're Not In A Stock Bubble

 September 25, 2012 04:00 PM
 


by Michael Tarsala

The big rally in Google shares while Facebook languishes says something positive about the stock market: It's one sign that we're not near a bubble.

Investors will always have an interest in companies with strong long-term growth potential such as Facebook. But Facebook (FB) is trading at more than a 40 percent discount to its IPO price for a reason: Investors are unwilling to pay up for a "prove it" story right now.

[Related -Bank Stocks: The Misbegottenness of the Volcker Rule Truly Knows No Bounds]

I believe they are more attracted to Google (GOOG). Like Facebook, it's putting up double-digit revenue and earnings growth. But it is doing so at a forward PE ratio of 15 times, not 33 times.

If you ask me, you want to see scrutiny of stocks like Facebook in a healthy, growing stock market. We might be in trouble if the Facebook-like stock stories that traded on future promises all were surging.

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

There are simply more polished stories in the tech sector than Facebook right now. It's a group where investors can still find value, says John Fattibene, financial planning director at Harvest Financial Partners and co-manager of the Domestic Dividend investment model at Covestor.

"We talk about how many of the companies in that sector have fantastic balance sheets to the point that some people argue that they have too much cash," he says.

"Cisco Systems (CSCO) is an example," he says. It is a top five holding in the Domestic Dividend model. He likes that the stock has $6 of cash on the balance sheet, trades for about 9 times forward earnings, and has potential upside based on his valuation target. Yet it also recently boosted its dividend and has a 3% forward dividend yield.

There are incremental positives at Google, even though it's not a dividend play. Core search business growth remains strong. There is reason to think that Google could soon overtake Facebook in display ads. What's more, the long-held worry that Motorola would hold back Google "seems to be abating," says analyst Mark Mahaney at Citigroup, who raised his target on the stock to $850 from $740 this week.

Contrast the Google story with Facebook: Its only quarter of reported earnings were a letdown. The company is still developing its advertising business around mobile customers. The quality of its user accounts has come under fire. There are privacy concerns. It has been dogged by governance concerns. Insiders have sold stock.

Most importantly, it still may be an expensive company to own -- even after its price swoon since May.

There is little doubt that Facebook is a real company with more than 900 million users and real profits. It is arguably trading at a discount to its future growth.

That future growth cannot be known, though. What is clear is that Google offers similar growth at a better price right now. Market participants are reacting skeptically to Facebook, which is a healthy sign for overall tech stock values.

We might otherwise be talking about a stock bubble.

Some investments discussed are held in client accounts as of September 24, 2012. These investments may or may not be currently held in client accounts.The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.

Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Covestor believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.

Some investments discussed in this presentation are for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments are presented for discussion purposes only and are not a reliable indicator of the performance or investment profile of any composite or client account. Further, the reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

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(1)
 
9/25/2012 10:22:11 PM
by Timmy John
I think these IPOs are better suited with VCs instead of the investment banks, I mean if you take FB for example, all their problems started because either FB or ML increased the float right before the IPO, not saying they aren't over priced but the stock fall started before that http://twitter.com/lefkofsky
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