Facebook Has No Business Being Compared to Apple, Google and Amazon
On the one hand, it intrigues many investors who are on the edge of their seats waiting to see how the biggest crave in the entire world (pardon the hyperbole) now performs as public company. Then there is a faction of Wall Street "traditionalists" who raise their eyebrows at the company's perceived over-valuation and pull out their calculators at a moment's notice to prove it.
When discussing Facebook's valuation, the names that often come up are Apple, Google and, to a lesser extent, Amazon. But the difference is that those companies enjoy sound businesses. The popularity of Apple cannot be overstated -- for that matter; neither can its exceptional and consistent execution . Yet while Apple trades at a high dollar price of $610, the stock remains relatively cheap at a price-to-earnings ratio of 17. So the question is, with Apple being the largest company in the world and making tons of money, should Facebook be valued at a comparable price without having fully developed the business to support it?
Google also is a high-priced stock. It should be rated "buy" at any level because, as with Apple, it makes a considerable amount of money and is arguably one of only a handful of companies that can support its valuation and growth expectations regardless of the market. For that matter, when one considers its true potential and the fact that it grew over the past three years under significant market and corporate pressures, it proves just what a sound business it has. Yet, the company trades at a P/E of (only) 18. So, again, should Facebook be considered worthy of Google's valuation?
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.