Forget Tesla. Facebook is a better buy now
You’re here (NASDAQ: TSLA) the shares hit a record high of $ 695 per share last week, briefly raising its market cap to over $ 650 billion. He has since returned some of those gains.
Earlier this year, another high-profile tech company surpassed a market cap of $ 650 billion – and never looked back. I’m talking about Facebook (NASDAQ: FB), the world’s largest social media company.
Facebook and Tesla are both part of the NYSE CROC+ index, which tracks 10 highly traded tech giants, including Alphabet and NVIDIA. And with Tesla joining Facebook in the S&P 500, millions of index fund investors now own a stake in both companies – whether they like it or not.
The parallels pretty much end there, however. And from an investment standpoint, Facebook is easily the best bet now.
Facebook has a sticky business model
Tesla operates in a competitive industry with many players – whether it’s electric vehicles or the automotive industry as a whole. Most car buyers aren’t as brand loyal as your typical Tesla owner. The typical car buyer is also a bit more price sensitive when choosing a vehicle – which is part of why Tesla had to lower the prices to stay competitive.
Unlike Tesla and the auto industry, Facebook dominates the social media arena, with 3.2 billion monthly active users on its Facebook, Instagram, Messenger and WhatsApp apps. In 2019, seven out of ten Internet users in the world – estimated at 4 billion – used a Facebook application.
With so many people already using Facebook, potential new users are drawn to the fact that everyone is already meeting and are less inclined to choose a competing service. For existing users, deleting Facebook potentially means instantly losing the networks of connections they’ve built over the years. Additionally, users have filled their Facebook and Instagram pages with photos, posts, and videos. It would be hard to get all that content away from Facebook.
Facebook has become, for many, more than just a social app – it’s a big part of everyday life. It gives users access to the latest news, thousands of games and videos, and marketplaces for buyers and sellers. For those who aren’t happy with Facebook, there’s virtually nowhere to go.
Since virtually everyone is on Facebook, businesses spend a large portion of their advertising and marketing budgets reaching out to social network users. In the United States, for example, eMarketer estimates that Facebook receives 23 cents of every dollar spent on digital advertising. As a result, Facebook’s revenue nearly quadrupled from 2015 to 2019.
This dominance created problems for Facebook. On the one hand, regulators are trying to ensure that Facebook does not abuse its dominant position. Critics are increasingly calling for the company to be dismantled by forcing it to divest its Instagram and WhatsApp apps. Even if Facebook is not dismantled, its cost of doing business will inevitably increase in the long run. As the business grows, public pressure will force Facebook to take on more responsibility as a corporate citizen.
But these risks are only an integral part of doing business. For now, the attractiveness of Facebook’s business model continues to outweigh its challenges.
It trades at a better price
Not only is Facebook the best company here, but its stock trades at a more acceptable price as well.
Facebook is already profitable. The company generates significant free cash flow each quarter, accumulating a strong balance sheet, with $ 56 billion in cash and no debt. In contrast, Tesla has lost money pretty much his entire existence growing his business. It still depends on the injection of external capital to maintain operations. Tesla has already been on the verge of bankruptcy, which prompted founder Elon Musk to shop the company on different occasions to buyers.
An assessment of financial data suggests Facebook should trade at a higher valuation, especially given the strength of its business model and ability to generate plentiful cash. But the reality is far from rational. Facebook trades at a price / sales ratio of 10 times the leak revenue, while Tesla trades at more than 20 times the leak revenue.
Admittedly, a double-digit sales price multiple doesn’t suggest Facebook is a loud buy. But compared to Tesla, Facebook’s price tag is significantly more attractive, especially given the company’s profitability and financial strength.
What this means for long-term investors
Even in a tough 2020, Facebook delivered 22% revenue growth in the third quarter. This is more impressive when you consider that many companies have reduced their ad spend this year.
There are signs that Facebook’s best years are ahead. Global average revenue per Facebook user may increase since it stands at $ 7.90, compared to $ 36.30 for US and Canadian users. In particular, monetize Instagram and WhatsApp could be a key driver of growth.
Facebook stock is up more than 100% after hitting a 52-week low in March, while Tesla is up more than 690% year-to-date. In the short term, both stocks face the risk of a correction.
But Facebook investors probably sleep better at night. After all, the company’s track record and long-term outlook make it a safer and better bet than Tesla – which, despite all the hype, still has a lot to prove.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.