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The initial public offering of Facebook is one of the most eagerly awaited events that I have witnessed in my 30 years in the market. In the same 30-year period, I have seen very few companies accomplish what Apple has accomplished.
I'd say that the probability is very high that Facebook will beat Apple hands down where it counts--return on investment--and that Facebook stock purchased in the IPO may beat the return on Apple over the next four years.
Let's compare the two
Recreation
Sometimes a unique set of events give birth to an enterprise in a manner that it cannot be recreated. Facebook is one of those enterprises. Given any amount of talent and money, Facebook cannot be recreated.
Google (GOOG) has proven the point with Google+. Google has the talent and the money. Google+ is very well done. In my analysis, the design of Google+ is better than that of Facebook in several respects.
Since Google is still the predominant search engine, there is a significant incentive for those who want to show up in Google searches to be an active member of Google+. Facebook simply cannot match this incentive. All of this has helped Google+ to attract about 125 million members in a very short period of time. Even with all of its advantages, Google+ is an online ghost town compared to Facebook.
Apple is unique in many ways but not in the aspect of recreation. Samsung is nipping on the heels of Apple. Several competitors are capable of making offerings on par with Apple in the near future. The game Apple has to play is to run faster so that competitors cannot catch up.
Apple does not have a unique advantage like Facebook.
In the aspect of recreation, Facebook wins and Apple loses.
Long Runway
Facebook is in the very early stages of monetization. Facebook has a very long runway ahead to generate hyper growth. In contrast Apple is a mature company. The days of hyper growth for Apple are numbered.
There is hunger among investors for quality growth companies. When it comes to the runway ahead, Facebook wins and Apple loses.
Platform
The success of Apple is in part due to the platform it has built. The ecosystem built around the Apple platform gives them an edge. As powerful as Apple’s platform is, the Facebook platform is likely to spawn an ecosystem much larger than that of Apple.
When it comes to platform, Facebook wins and Apple loses.
Disruptive
Both Apple and Facebook are disruptive companies. Apple disrupted the music, phone, and tablet computer business. In the future Apple may disrupt the TV business.
Facebook has totally disrupted how people connect to each other. Facebook is likely to be a disruptive force in advertising. However the extent of disruption made by Facebook may not match the disruption that Apple already produced. For investors, it is not what has happened, but what will happen that matters. Going forward Facebook is likely to be a bigger disrupting force than Apple.
When it comes to disruption, Facebook wins and Apple loses.
Stickiness
Apple is still mainly a hardware device vendor. Apple has done an unprecedented job of generating stickiness for its devices. iTunes has always been sticky. Siri has added to stickiness. iCloud will turn out to be stickier than anything else Apple has ever done before.
Facebook offers stickiness that is out of this world. Active Facebook users spend more time logged in than users of any other site, they respond to more offers than offers posted elsewhere, and they create more viral buzz than members of any other site.
In the end, Apple has to come up with one new hit after another. In contrast all Facebook has to do is to simply follow the evolutionary path that is ahead of it.
When it comes to stickiness, Facebook wins and Apple loses.
Valuation
On the surface Apple is cheap on traditional valuation measures and Facebook is very expensive.
Those investors who are capable of getting past slavish superficial devotion to traditional metrics can readily see that Apple is not as cheap as it seems and Facebook is not as expensive as it seems. There is no shortage of such investors with deep understanding of how valuations work as evidenced by the fact that Apple trades at trailing P/E of only 13.81 at a time when its quarterly earnings enjoyed a year over year 94.1%.
Examples of companies not being able to continue the streak of hits such as Nokia (NOK) and Research in Motion (RIMM) abound.
Facebook is planning to offer as many as 388 million shares this week in the $28 - $35 price range. At the top of the range, Facebook will be valued at nearly $100 billion.
By 2016 Facebook may easily earn $5/share and based on the growth trajectory ahead of it, the stock may easily trade at $150.
In contrast, Apple will find its P/E shrinking as the company approaches $70-$80/share in earnings. Apple’s stock is likely to hit a brick wall in the zone of $1000 to $1100 based on the demographics of its customers.
If Facebook’s stock reaches $150 and Apple’s stock reaches $1000, Facebook investors will enjoy a 427% better return.
When it comes to potential returns, in my view, Facebook wins and Apples loses.
Risks
The past is often the prologue to the future. Apple has made very few mistakes compared to other companies. It stands to reason that the risk of execution from Apple is lower than from other companies.
In contrast, Facebook’s history is replete with mistakes. Facebook’s management team is untested in rapidly growing revenues from its present base. Further what Facebook will attempt to do has never been done. There is significantly more risk in Facebook than in Apple.
An investment in Facebook is not for the faint of heart.
When it comes to risk, Facebook loses and Apple wins.
Investors willing to pay for Facebook at the high end of the offering price at $35 are not crazy. There is a perfectly good rationale for Facebook's valuation. At the same time investors taking partial profits in Apple are not crazy either, as the article shows investments other than Apple may produce higher returns.
About Me: I am an engineer and nuclear physicist by background. I have founded two Inc. 500 companies, and have been involved in over 50 entrepreneurial ventures. I am the chief investment officer at The Arora Report, which publishes four newsletters to help investors profit from change. Please feel free to write me at Nigam@TheAroraReport.com.
You can follow me here and get email notification when I publish a new article.
Full disclosure: Subscribers to The Arora Report are long Apple from $131 and have taken partial profits at $360, $525 and $629. We are also long Nokia.
