Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
Last week, Facebook Inc. reported its latest financial results. While I'm not a buyer of the stock yet, I have to admit I'm warming up to the social media giant. The company has become an impressive force in the mobile business. Its growth is indisputable and its execution has been solid.
In fact, had I chosen Facebook instead of Google Inc. when I initially constructed my Strategy Lab portfolio, I'd be a bit further ahead. While Google is up about 20 per cent since the portfolio launch in September, 2012, Facebook is up almost double that amount.
But as my readers should know by now, I don't focus on short-term movements. I focus on the big picture. I care about how a landscape is changing over many years, and how public companies can profit from the change (or be hurt by the change, leading to a short-selling opportunity).
I don't want to run through all of Facebook's financials from last quarter, but I do think one number is highly meaningful. The company now generates 30 per cent of its advertising revenue from mobile viewers. Any guesses as to what that number was one year ago? I'll tell you. It was zero. Facebook has unquestionably proven that mobile traffic can be monetized. And this doesn't seem like some flash-in-the-pan experiment by big brands, either. Judging from the effort Facebook is placing on analyzing return on investment for its advertising customers, it's real.
Facebook has about 751 million mobile monthly users, according to its latest results. That's up from 488 million a year ago, which is a 54-per-cent rise. Advertising revenue is up 43 per cent year over year. With so many users, you might think the law of large numbers will start to slow these guys down, right? I'm not so sure.
As mobile usage skyrockets, Facebook will likely benefit. Last week, Marc Andreessen, who is famous for co-founding Netscape Communications, predicted that 2013 will be the year when $50 Android smartphones take the rest of the world by storm. "Smartphones are about to be put in the hands of another three billion people who don't have them," he said in an interview with Bloomberg TV.
Three billion people! That's not a prediction for the next quarter or even next year. It's a multiyear growth trajectory he's talking about. But it underscores why I believe you should be invested in this industry. Perhaps Facebook is the right investment. It's certainly generating impressive growth and I think it can continue for another few years.
Analysts think Facebook will earn 78 cents (U.S.) per share in 2014, putting the forward-year P/E ratio at about 35 right now. I don't think that's an absurd price to pay for a dominant leader in a fast-growing market. But I'd still rather own Google (and I do, both in my Strategy Lab portfolio and personally).
If Mr. Andreessen's next "three billion" users prediction comes true, Google directly benefits. The Web search giant controls the operating system that will be running on the majority of these phones. Google can monetize this just as well as Facebook, if not better, in my opinion.
I also prefer Google's diversity; I think it gives Google even more growth opportunity. Facebook is still primarily an advertising company. So is Google. But the Mountain View, Calif.-based search giant is also expanding into wearable computing (Google Glass), and perhaps even subscription content, which I find fascinating.
To give you a taste of what I'm looking forward to, let's look at YouTube. Last week, Google chairman Eric Schmidt revealed that its YouTube unit has now grown to the point where it gets one billion unique viewers per month. I challenge you to find a TV network with that kind of reach. YouTube has surpassed TV. This week the tech blogosphere is ripe with discussion about the expectation of an imminent launch of paid subscriptions on YouTube.
Think about the possibility of specialty video creators selling their content directly to consumers via YouTube. It's the video equivalent of publishers selling books directly to consumers via the Kindle platform. You're an expert in makeup or hairstyles? Sell a subscription to your premium content. You're awesome at teaching people how to restore old cars or renovate a kitchen? People will pay for the content. YouTube has a huge audience, and just like Amazon, people will trust handing a payment over to Google versus an unknown independent vendor.
Google stock trades at 16 times next year's EPS estimates, according to S&P Capital IQ. Yes, I'm warming up to Facebook. But I still see better value (and incredible growth) in Google.
Chris Umiastowski