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May 22, 2012 at 09:08 AM
Facebook shares tumbled 11% to $34.03 on Monday, and aren’t faring much better on Tuesday, as questions over what happened and who’s to blame (NASDAQ?) continue.
Jack Hough, writing on SmartMoney’s Real-Time Advice blog, notes, “Shareholders who had bought the stock for a quick flip must now consider whether to defy all those Facebook skeptics and hold it longer. That has worked out beautifully for anyone who has held Google (GOOG) stock since its 2004 debut. It has multiplied sixfold in price.”
Like Facebook (FB), Google is a purely online business with a dominant market share, Hough adds. It makes most of its money from advertising and turns a high percentage of each revenue dollar into operating profits. Its stock was also initially panned by many as too expensive.
But Hough believes Facebook will have serious trouble generating Google-like returns for investors, noting the “important differences between the two companies.” He helpfully lists three:
1. Facebook is twice as expensive as Google was following its own stock market debut.
“When Google came to market in August 2004, it had booked $2.3 billion in revenues over the prior four quarters,” Hough writes. “The stock ended its first day of trading at a price that valued Google at $27 billion. Those numbers make for a price-to-revenues ratio of about 12. Facebook ended Monday with a value of $93 billion, and it has brought in $4 billion in revenues over the past four quarters. That’s a price-to-revenues ratio of 23.”
2. Google has already plucked the low-hanging fruit.
Back in 2004, newspapers and magazines together captured 43.8% of advertising spending, versus just 3.7% for websites, Hough explains, citing Zenith Optimedia.
