Would You Rather Buy Amazon (AMZN) Or Facebook (FB)?

By: ispeculatornew
Date posted: 03.23.2012 (5:00 am) | Write a Comment  (0 Comments)

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Much has been said in recent weeks about the upcoming Facebook IPO as the leading social network is expected to become public in the next few months at a valuation expected to be between $75-100B. I was thinking about doing a comparison with LinkedIn (LNKD), a very similar company that I think will end up being a great story when all is told and done. The truth however is that I consider $LNKD to be very expensive so perhaps not the best point of comparison. Guess which large company trades in that range? Online powerhouse Amazon is currently valued at $84 billion, basically right in the middle of that range. This should certainly be interesting because I recently read 2 interesting posts that I also tweeted (@intelligentspec):

Complete miscalculation of Facebook’s value
Amazon overvalued?

Both were very interesting and the Amazon one certainly made me rethink my evaluation of Amazon as a long term play. The reason why I am comparing these two companies is not that they’re similar. They have a few points in common (web based, social aspect, etc) but also have so many differences (sheer size, growth, margins, etc). I do however think it’s a very fair question to ask and would love to get your thoughts later on in this article!

Valuation Challenges

No doubt, both of these companies present tremendous challenges in valuationss and I think it’s very possible to make a case for either one as being a great buy or as an overvalued stock. Let’s start off with a few big ones:

Facebook

Facebook certainly carries a lot more business risk than the average $100B business. It has a very loyal user base but so did MySpace just a few years ago. The fact is that some other competitor such as Google could end up taking a large part of Facebook’s market share.

Monetization: Every time someone brings up the fact that Facebook has no space left for space, I like to bring up the fact that user growth is only a small part of the story. In my opinion, it’s all about adding new sources of revenues. There are plenty of ideas (mobile ads, 3rd party ad services, increasing usage of its virtual currency, adding paid services for corporations, etc) but the fact remains that Facebook has not seen this as a priority up to now. With Mark Zuckerberg still holding the majority in Facebook, it’s not clear how determined he is to make that happen.

Amazon

Margins: Amazon has been reinvesting tons into expanding its capacity, its offering, buying smaller websites in niche areas, becoming the leader in cloud compuiting, etc. But much of this has been done at the expense of margins which have been very small (especially when compared with a company like Facebook and have not improved over the past few quarters).

Unprofitable businesses: Sure, launching a business like the Kindle makes a lot of sense but does selling it for so little also make sense? What is the objective here? How about Amazon Prime? How profitable is the service? Amazon seems to be after market share these days and at some point it will need to turn those into profits.

The Numbers

It would be very difficult to compare the revenues numbers in the same chart given the differences so let’s do this instead. I will compare the revenyes for both individually but then compare the growth rates year over for the last 4 quarters (given that we do not have more history for Facebook.

Revenues

I don’t think there is any doubt that Facebook will probably never catch up to Amazon, or anywhere close to that. The fact that Amazon continues to growth so fast despite its huge size is very impressive. Of course, as is the case with any non-luxury physical goods company (that is the bulk of AMZN’s business after all), margins tend to be much smaller. So let’s take a look at the critical number here, the profits.

Clearly, this chart will probably make you rethink. Already last year, Facebook made almost as much money as Amazon and this year it should be much higher. I think these numbers are much more important and representative than charts that detail revenues per user or that compare Facebook to Google at the time of its IPO.

In The End

I think it’s very close but also very difficult to compare. Clearly, one stock has a much clearer path and will eventually become the next generation Walmart (WMT) – I could probably argue that it already is. The other one, Facebook (FB), has a lot more upside in my opinion but also carries a lot more risk. In the end, if I were investing in a safer retirement account, I would probably go with Amazon. In all other cases though, and in general, I would argue that Facebook has enough upside to justify it being a bargain even at these valuations. What about you? Which stock would you prefer buying?

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