Facebook Has No Business Being Compared to Apple, Google and Amazon
Maybe Facebook should be judged more closely with Amazon, a dominant power in its own right. For those who are waiting for Amazon to falter or drop down to "more realistic" valuations, you are going to be disappointed. Not only does the company continue to show that it has the ability to execute, but it is one of the best at adapting and evolving into untapped growth markets. Its enormous P/E has always offended a lot of traditionalists, but, remarkably, the company has always performed in a manner that suggests Wall Street is right for having applied a multiple that is almost eight times that of both Apple and Google. (Let that marinate for a while.) So is that where Facebook should trade?
There is no denying that Facebook has become an incredible phenomenon, one that is proud to report almost 1 billion in active monthly users. That is almost 15% of the world's population, all interconnected with Facebook. The company provides a potential consumer base that is unmatched in the world today. From that view, its potential to offer immediate returns to businesses in the form of targeted advertising is enormous. But does that make it worth $100 billion? That is what Wall Street thinks. But I believe investors are quick to confuse a great idea with a great business, two entirely separate terms.
The company's IPO and pronounced valuation started to intrigue me more when I heard about slowing revenue. Facebook said it earned over $1 billion during the first quarter while also reporting a 12% decline in net income from a year earlier. All of which was attributed to an increase in spending, which is not a huge concern because it costs money to grow. In fact, that tends to be the norm in the tech sector.
However, what puzzles me is the fact that Wall Street is quick to apply a $100 billion valuation on a company that has yet to prove that it has a sound business. Apple sells products, Google is dominant in ads, and Amazon leads in e-commerce and sells a host of services including streaming movies. What does Facebook sell? How much is social networking worth? Should investors base its valuation more closely with LinkedIn or Groupon?