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Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

Over the past few months I've grown more interested in the investing merits of both Facebook Inc. and LinkedIn Corp., two of the largest publicly traded social networking companies.

To be sure, my preference remains Google Inc. Given what the company is doing with YouTube, the world's dominant video-sharing service, and Google+, its own entry in the networking field, I feel the search giant is evolving into a social powerhouse. But as with any emerging trend I think it's smart to look at multiple players.

Social networking is poised to grow as people spend more and more time on Internet-connected mobile devices. Money will inevitably flow to where the eyeballs are.

Mary Meeker, the famous tech analyst, estimates that about $20-billion (U.S.) a year in revenue will likely shift out of print advertising and toward the Internet over the coming decade. And that's just in the United States.

Recent news from Facebook has convinced me that this figure might wind up being higher than even Ms. Meeker is projecting. Late last week Facebook reported that it now has one million active advertisers.

This figure includes a lot of very small businesses. Facebook makes it easy for tiny advertisers to pull out their credit card and publish an ad that targets a specific audience on the social networking site. I think there is a big wave of growth still to come as smaller businesses create self-serve ads on social networks.

LinkedIn should benefit from this trend as well because it also has a self-serve ad platform – and caters to a white-collar audience with money to spend.

The company is not just a social network. It's also the world's largest recruiting platform, and derives 57 per cent of its $325-million in revenue from "talent solutions" that allow human resource professionals to look for potential hires. Another 20 per cent of revenue comes from premium subscriptions. These represent people who see value in paying LinkedIn every month for better networking opportunities.

Only 23 per cent of LinkedIn's revenue comes from what it calls "marketing solutions" – advertising to you and me. At the moment, the company's advertising platform has limited features. This is either a huge problem or a huge opportunity. I view it as the latter.

Given the company's proven ability to execute, LinkedIn is likely to improve its ad platform and generate even more income from ads down the road. That should fuel strong growth – even stronger than at Facebook, which already has a sophisticated ad platform and generates the vast majority of revenue from advertising.

A note of caution: LinkedIn and Facebook look quite expensive when measured by traditional yardsticks. According to S&P Capital IQ data for the next 12 months, LinkedIn has an enterprise value – the total value of its equity and net debt – that is equal to 11.8 times its revenue. Facebook trades at an EV-to-sales ratio of 7.9. In comparison to more traditional stocks, this is frothy territory. So neither is a good bet for cautious investors, despite their appeal to people, like myself, who believe the social-networking trend is only starting.

If I had to choose between the two stocks today, I would buy LinkedIn. Sure, Facebook has 1.1 billion monthly active users compared to LinkedIn's 170 million unique visitors. But I think it's quite possible that LinkedIn's members are worth three times more than Facebook users, given their higher average incomes.

If you adjust for this you could argue that, all else being equal, LinkedIn's market cap should be approximately half of Facebook's. However, the stock trades at only 32 per cent of Facebook's market value, despite having higher growth. (LinkedIn's year-over-year revenue growth was 73 per cent last quarter versus 38 per cent for Facebook.) In my view, LinkedIn is the cheaper stock.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 2:55pm EDT.

SymbolName% changeLast
D-N
Dominion Energy Inc
+1.26%49.13
GOOG-Q
Alphabet Cl C
+0.28%152.36

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