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.
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.
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.
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