Facebook Trades At A Similar Valuation to Google, Despite Growing Twice As Fast
When comparing two companies in the same industry, investors are usually willing to pay a higher P/E multiple for faster growth. Since the investor is getting more earnings growth from the faster growing stock the investor usually has to pay a premium vs. its slower growing counterpart. In the case of Facebook and Google however, both companies trade a similar valuation despite the fact that Facebook is growing significantly faster. Both companies are well positioned to capitalize on the ongoing shift from traditional media to digital media. However, since Facebook is earlier in its growth curve, growing from smaller base, and gets a larger percentage of its revenue from mobile advertising, the shares are undervalued and are poised to make a run to $250.
Facebook is earlier in its growth curve than Google, and therefore should continue to grow at a higher rate for the foreseeable future. Indeed a look at current and expected revenue growth rates confirms this. For ’17 Google is estimated to grow revenues at 19%, while FB’s revenue is pegged to grow at 38%. Looking out to 2018, Facebook’s expected revenue again is forecast to grow 28.1%, almost twice as fast as Google at 16.2%. The bottom line at FB is similarly forecast to growth significantly faster for FB vs. Google; Over the next 5 years Google is projected to grow at 18% annually while FB is forecast to grow 25% annually.
Since FB is growing its revenues from a smaller base, it is easier for Facebook’s revenue growth to surpass Google. In 2016 Google had $90.27 billion of revenue and FB had $27.64 billion. For example an additional $3 billion of revenue ads 12% to Facebook’s total revenue while only adding 3.3% to Google’s revenue.
Both companies are poised to continue benefitting from the secular trend of increased digital advertising at the expense of traditional media (Television and Print). According to Emarketer, digital ad expenditure surpassed TV for the first time in 2016, and the gap is expected to widen. Mobile ad expenditure is forecast to be the main driver of digital’s growth in 2017, accounting for over 70% of digital and more than one quarter of total media outlays.
The fact that mobile advertising makes up a larger portion of Facebook’s total advertising revenue than Google’s augurs well for FB’s outsized growth. Mobile ad revenue at Facebook accounted for 85% of total ad revenue in the 1Q of 2017. Google on the other hand is forecast have about 50% of its total ad revenue from mobile ads. Since mobile advertising is the fastest growing part of digital advertising, this dynamic should help keep Facebook’s growth rate higher than Google’s.
This is not to say that Google is overvalued, in fact Google shares are reasonably valued. FB on the hand is extremely undervalued. Since the calendar 2018 PE ratios are similar for both FB and Google (FB ’18 PE is 25.42 vs. Google ’18 PE of 23.90), investors are getting FB’s extra growth without a premium compared to Google.
As Facebook continues on its growth path there is potential for the shares to command a higher multiple. The trends driving growth at both FB and Google are multi-year trends, and both companies are poised to benefit. Facebook’s dominance in social media vs. Google gives it a compelling advantage for advertisers to reach consumers. Additionally, Facebook is able to target ads with unmatched granularity due to the vast amount of data is has about its 1.8 billion users. Google still has the dominant platform for mobile search, and its YouTube platform is poised to capture ad dollars shifting from TV. This positions Google well to capitalize on the shift to mobile as well.
Yet in terms of growth, it is likely that Facebook will continue to significantly outpace Google. Facebook is earlier in its growth curve, growing from a smaller base, and has a higher percentage of its revenue from mobile advertising. These facts combined with the fact that the valuation of Facebook is similar to slower growing Google, leads us to a $250 one-year price target for FB.
All of the ideas expressed in this article are the opinions of Ideal Asset Management LLC
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Ideal Asset Management owns shares of FB and GOOGL for its clients
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