Facebook’s (FB) share price got a lot smaller after its initial public offering in May, but that’s because sellers couldn’t see the big picture, according to Kevin Landis, a veteran Silicon Valley investor. Facebook is in the vanguard of an economic, social and technological revolution that makes the stock hard to value using traditional analytical tools, said Landis, who manages the Firsthand Technology Opportunities Fund.
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Buying the stock will allow investors to join the revolution at a price that he believes will be judged a bargain in the future. If that seems like thinking for a new New Era, Landis concedes as much and admits that the stock is by no means cheap in the present. After being offered for $38 in the IPO, it climbed as high as $45 before making a swift descent below $18. It has since recovered to just under $30. That’s still less than the offering price, yet Facebook’s price-to-cash flow ratio, a key valuation measure, is more than 200, compared to less than 20 for its main rival, Google (GOOG).
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Landis expects some selling to come in for Facebook in the $30s from investors desperate to break even. Once that’s done, he predicted in an interview, “the stock will find its way into the $40s, but I can’t say how long it will take.” He offered several reasons for his optimism, starting with the advances that Facebook has made in the way that advertising is sold:
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“The media-buying world is in the midst of a multiyear switchover from [buying print and TV ads] to placing them online,” he explained. “Purveyors of technology have figured out that you can make an ad more effective because you know more about the people reading the ad and what they want; if the ad is more relevant to people, it will be more effective.”
Facebook targets ads in a way that’s more effective than conventional media outlets, in Landis’s view. More important, he said, it’s more effective than the way Google does it:
“The simple question to ask yourself is, ‘What’s more valuable – placing ads with Google, where they know what you’re searching for, or placing ads with Facebook, where they know everything about you?’ They withstood the first competitive push that Google made against them, Google+, which many people would say is Google’s top priority. It really hasn’t put a dent in Facebook, and I find that very impressive.”
For the uninitiated, Google+ is the company’s attempt at a social network. As Landis suggested, it has not taken off. He recalled a great description that someone had of the endeavor: “It’s like a rich kid in high school who discovered he wasn’t invited to a party, so he threw a better party and no one came.”
There has been little celebrating by Facebook’s shareholders, except maybe the ones who bought near the bottom in early September, and if you compare Facebook and Google on raw numbers, well, there really is no comparison. Facebook’s stock is down 23% since the IPO, while Google’s has risen by a similar percentage, as seen in a stock chart.
Comparisons of many financial figures are meaningless because Facebook has such a short reporting history. Also the stock sale caused significant distortions in some measures. One encouraging chart for Facebook shareholders shows the company's revenue growth running at a slightly faster pace than Google's, which is no slouch in that department.
Landis also contends that Facebook’s stock has suffered because some significant initiatives will create short-term pain before producing long-term gains. The timing of one of these was not the best, he conceded. “Facebook figured out that it needed to make the transition to mobile, but that was going to be one step backwards, two steps forwards,” he said. “That made the numbers a little less compelling right around the time of the IPO. But when the history is written, people will agree that they were right to focus on making that transition.”
It may not charm investors who were burned by the unhappy ending of the tech bubble in 2000, but Landis finds much appeal in the narrative of a company that’s less profitable and far more expensive than its main rival but that’s also a fraction of its size and therefore has a lot more room to grow.
“Any interesting, new idea, you have to pay up,” Landis said. “Look at Facebook’s market capitalization and compare it to Google’s. You’re taking a leap of faith that Facebook will figure it out and grow into its clothes.”
Landis has a great track record – his fund gets four stars from Morningstar – but investors making the leap must hope that the outfit isn’t the same one the emperor pulled off the rack.
Conrad de Aenlle, a contributing editor at YCharts, has covered investment and personal-finance topics for more than 20 years, writing for The New York Times, International Herald Tribune, Los Angeles Times, Bloomberg News, Institutional Investor, MarketWatch and CBS MoneyWatch. He can be reached at email@example.com.
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