A Stock Worth Buying Before Facebook
12/14/2011 11:10 am EST
I’m not on Facebook all that often anymore.
Partly it’s because I’ve turned into a heavy professional user of Twitter, and partly because, well, it’s no longer 2009. That was the year I joined, when Facebook had roughly half of the 800 million members it has today.
That means tens of millions of people have likely made the same journey from discovery, excitement, and engagement to a bit of exhaustion and boredom setting in.
I ignored Facebook for a while, then dipped a toe back in. Recently I tried to find a cousin, but he’d deleted his profile. And he’s not the only one, apparently.
With growth slowing in Facebook’s maturing Anglo home sphere, more and more of the latest recruits live in developing countries like Mexico, Brazil, and Indonesia. How long before they too grow distracted?
The possibility that most users’ first year on Facebook might turn out to be their busiest is only one of the concerns stalking the social network. But it’s a big one, and I agree with Ben Bajarin on the pitfalls of clutter and noise as the circle of friends expands. Facebook knows it too, hence recent attempts to filter newsfeed information by category of friend.
Mark Zuckerberg will be fine, of course. Facebook will prosper long after its initial public offering next year, which could see shares trade for as much as 100 times trailing earnings.
Whether it will continue to garner such a huge share of the time people spend online is less of a sure thing. In the coming years, Facebook will face a host of competitors old and new, big and small, many of them less cluttered and more focused.
One of the better niche plays in social networking already has earnings that are roughly 30% of Facebook’s. And it will start trading next week at a market cap of about $3.7 billion for everything, lock stock and barrel, with little of the fanfare accorded to Silicon Valley IPOs.
A week from today, the Vs will fall off those tickers as the companies go their separate ways. Every pair of Expedia shares will turn into one share of TripAdvisor and one of the Expedia bookings hub. Both deserve to be owned, even in these tumultuous times.
TripAdvisor is growing revenue at some 30% a year, with an operating profit margin approaching 50%. People love recounting their travel, and while Facebook friends may not care for all the details, they’re of great interest to others planning trips to the same place.
That’s given TripAdvisor one of the biggest troves of user-generated content on the Internet, an invaluable tool for travelers who used to make their plans mostly from marketing materials. I can confirm that the Saute-Moutons jet boat tours of the river rapids near Montreal really is an unforgettable experience. And the reviews don’t lie about the views from the roof of the Residenza Torre Colonna in Rome.
All this means that the site should prove just as useful and “sticky” in year five as it would be to a first-time visitor.
And it’s not coming to market at a nosebleed valuation. At approximately 12 times trailing cash flow, TripAdvisor is, in fact, dirt-cheap by the standards of social media. Next year’s IPOs of Facebook, Yelp, and Zynga will only serve to underscore that point.
Meanwhile, the rest of boring old Expedia will sell for less than six times trailing cash flow after the split, while recently growing revenue at 15% year-over-year. It’s more of a value proposition than highflying rival Priceline.com (PCLN), even factoring in the latter’s superior growth rate.
The current cash flow from Expedia and TripAdvisor is in Facebook’s ballpark, for a fraction of the cost. And TripAdvisor should produce superior growth over the next few years.
Facebook and TripAdvisor already partner to let Facebook users see their friends’ recommendations on the travel site. Given the synergies and the disparity in valuation, TripAdvisor would be among the most logical Facebook acquisition targets after the IPO.