Here’s a Depressing Thought for Holders of Facebook: It’s Just a Younger Yahoo!
Facebook (FB) shares have lagged since the company completed its ballyhooed initial public offering in May.
Why did Facebook stock lose momentum? When it failed to pop, news accounts laid heaps of blame on the front veranda at Morgan Stanley (MS), for allegedly misjudging the market when it advised Facebook to boost the number of shares offered by 25%. Meanwhile, the Securities and Exchange Commission is reportedly investigating technical problems that NASDAQ experienced on the stock’s first day of trading.
I think there’s a simpler explanation for Facebook’s ills in the stock market. It’s Yahoo! (YHOO)
Yes, boring old Yahoo. The Sunnyvale, Calif., company may have its flaws, but its source of revenues is essentially the same as Facebook’s and its shares are so much cheaper. The Yahoo shares are acting as a heavy anchor, keeping Facebook’s stock from flying upwards.
If you own Facebook stock or are tempted to buy it, look at Yahoo instead.
You may have forgotten Yahoo. Remember the 1990s, when you used to depend heavily on the company to help you find cool stuff on the Internet? This was the age of dial-up connections. Then in 2000 the Yahoo yahoos decided their website should focus on becoming a web “portal”—a happy, well-lit place where the average Joe could get his email, read the news and sports, soak up some financial information, set up a few dates, play games, archive his photos, do a bit of Internet chatting and on and on.
Yahoo.com became a kind of AOL.com for the brave, new Internet—not a walled-in Internet service, as AOL had been, mind you. Rather, Yahoo.com would be a digital Shangri-La—a website so fine there would scarcely be a reason to surf away from it. Yahoo would make money by selling advertising.
And what about Internet search? That function would still exist at Yahoo.com, but it wouldn’t be as important as all those other goodies. Yahoo subcontracted search duty to a wee understudy named Google (GOOG).
It’s hard to believe it now, but back in 1999 and 2000, people really believed this was a great strategy. The theory was that Internet search would become a commodity, but that well-made content was king. Except…. mm… oops.
It turns out Internet search is a tougher nut to crack than most people expected. Even the brilliant gang at Microsoft (MSFT) has struggled to get footing for the company’s Bing offering. And content isn’t quite as kingly as it once seemed. Google has taken over the world, and Yahoo stock has been dawdling ever since.
Yes, people opt to spend significant chunks of their day in the pretty garden that Yahoo has built. (Some of the best journos pray to the heavens for Yahoo to reprint their stories on its homepage, so the stories will be read by millions of people.) But the Yahoo horde is often dismissed by Internet cognoscenti as mindless sheep, susceptible to the seductions of superior Internet service providers (many, like email, video and news, are offered by Yahoo’s former understudy, Google.) The numbers of Yahoo faithful spend less time at the portal these days, so Yahoo’s advertising revenues have slumped.
Meanwhile Google’s revenues have rocketed.
Yahoo’s earnings have only marched forward lazily.
Enter Facebook. It offers you a way to get some news, chat a bit and get a date if you’re single. Hey, guess what? When you strip away all the yammering about social networks, what remains is this: Facebook is a lovely garden on the Internet that makes its money by selling advertising.
Facebook’s revenues in 2011 were $3.7 billion, putting it more or less in the same league as Yahoo, which hauled in nearly $5 billion.
On its revenues of $3.7 billion, Facebook earned $668 million. Yahoo earned just over a billion dollars on its $5 billion in revenues. Yahoo’s net margin was a slightly higher, 21% to Facebook’s 18%.
Get it? We’ve got two lovely Internet gardens that sell advertising. They’re both well established. Except one of the gardeners’ stock is trading at 16 times its expected 2012 earnings and the other is trading at 60 times. Of course, the former is Yahoo and the latter is Facebook.
I know, there are differences between the two. Facebook’s per-share revenues are growing while Yahoo’s are gradually contracting. And Facebook’s employees are far more productive, hauling in $1.1 million per employee in 2011, versus Yahoo’s $350,000-per-employee figure. But shucks, if that’s the bull argument, then why is Google, which has rapidly growing revenues and a per-employee revenue of $1.2 million, trading at more or less the same price-earnings ratio as Yahoo is?
I think investors are optimistic as a group, but not crazy. I’ve said this before: We’re living in a post-crash world. One of the few benefits of the economic meltdown of 2008 is that it sobered investors like they haven’t been sober since the 1930s. They notice things like massive differences in PE ratios between two stocks that are essentially similar.
The investors willing to ignore the differences between the two companies and hold Facebook shares when they could instead own Yahoo’s shares (or Google shares, for that matter) at a fraction of the price-earnings ratio were either playing the momentum game—that game ended just hours after Facebook went public—or they continue believe that Facebook and Yahoo are vastly different entities.
And that’s a pretty small group of folks.
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