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I like Facebook stock so much I’m buying more

Ed Sweetman/Getty Images/iStockphoto

The message came across Thursday night: "I hope you got out of Facebook stock. That stock is a dog."

The well-wisher was a casual friend, a former journalist who likes to give me stock tips now that he has a career in public relations. He was referring to my very public about-face earlier this year when I dispensed with my past criticisms and bought Facebook shares on their first day of trading, at $38 (U.S.) apiece.

His message, of course, was sent on Facebook, via his mobile phone. It was enough to convince me to go out and buy more of the stock, now that it's crashed into the low $20s.

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This is not a break-the-bank bet. I had 50 shares, and by the end of Friday, as Facebook hit new lows following its first earnings report as a public company, I bought 50 more.

Throwing good money after bad? Perhaps. But my portfolio is heavy with mature, dividend-paying stocks, and there's room for some speculation – particularly on a company with the enormous customer base of Facebook.

For a bull, which I suppose I now am, I remain skeptical about Facebook's prospects for monetizing those customers. People still complain loudly about changes to the Facebook experience, and there will have to be some changes for Facebook to boost its exceptionally modest revenue-per-minute-of-use figures.

But the market capitalization of the company is now down to about $52-billion, or $100 for each of the company's 552 million daily active users in June. Will the value of each of those users be worth more, much more, than $100 apiece over the entire life of the company? I'm willing to risk a couple thousand dollars of my retirement money that the answer is yes.

More broadly, I'm dumbfounded about the market pessimism about the company and its post-IPO share performance. Even critics have to acknowledge that Facebook is the undoubted leader in social media. Sure, its growth is slowing – but a lot of companies would kill for the 32-per-cent jump in revenue that the company just reported.

Or, as I responded to my friend, "Facebook is down and Kayak is up? I don't [expletive] think so."

Kayak is Kayak Software Corp., the proprietor of an online travel-search site. The company had been flirting with an IPO for some time and was scheduled to debut soon after Facebook in May, but kicked the offering back.

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Boosted by what may be irrational enthusiasm in the sector – Expedia and Priceline.com have been huge winners this year – Kayak went public July 20, jumping nearly 30 per cent its first day to $33.18 from its $26 offering price.

I like the site – it searches multiple other sites for the best price on flights, hotels, and cars – but I'm not sure what its sustainable competitive advantage is in a world where Google is building a similar product.

Yet Kayak is now slightly more expensive than Facebook on a forward price-to-earnings basis. According to estimates in Standard & Poor's CapitalIQ database, Kayak clocks in around 47 times expected earnings for the next year, while Facebook is down to 44.

Put that into perspective: The continuing disaster that is Groupon Inc. is still priced at 100 times forward earnings. LinkedIn Corp., at a forward P/E of almost 130, is roughly three times as expensive as Facebook.

What's cheaper? There's Zynga Inc., the maker of Facebook's silly games, which is now down to about 22 times forward earnings thanks to its own earnings disaster this week.

I also own Zynga, having purchased 200 shares at $4.49 apiece, because I've been amazed at its ability – far better than Facebook's – to extract money from its users. But Zynga's growth story is now broken. The company reported a quarter-to-quarter drop in a key measure of customer use, and its slate of new games has been delayed. At $3 a share, it's trading just above the $2 per share that its cash and real estate is worth – but its cash position could deteriorate if it begins losing money or spends big on some kind of acquisition.

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So, no matter how cheap, I haven't pulled the trigger this week on adding to my Zynga position, even if it means I miss the 52-week low.

But Facebook? I'm happy to double down at these levels.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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