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Facebook Inc (FB), Starbucks Corporation (SBUX): Lifting the Cloud of Pessimism

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Since its IPO burned a lot of early investors, Facebook Inc (NASDAQ:FB)’s stock has suffered from a cloud of pessimism. Any news on the company is rarely viewed favorably. Year-to-date, the stock is down more than 16% while the S&P 500 has climbed 11.5%. This makes shares attractive once again, as the market has beaten down the stock based on several concerns that I believe they’re making too much of.

Facebook Inc (NASDAQ:FB)

Market saturation

One of the biggest fears I see is that Facebook Inc (NASDAQ:FB) has saturated its most profitable markets. North America provided nearly 50% of the company’s revenue when it went public, that number fell to 46.5% last quarter. That’s not a bad thing, but the 6.6% growth in monthly active users from the U.S. and Canada is used to scare investors.

The average U.S. or Canadian Facebooker (my mom’s term) generates $3.50 in revenue per quarter. Europe generates $1.60, Asia generates $0.64, and the rest of the world generates $0.50.

Many are concerned that Facebook Inc (NASDAQ:FB)’s current position in the North American and European markets will limit its growth potential. It doesn’t deserve a forward PE of 30, as growth will be much slower than in the past.

Meanwhile, Starbucks Corporation (NASDAQ:SBUX), a company that screams saturation in the North American market, is growing just fine according to the market. Last quarter, Starbucks grew its Americas Segment revenue by 10% and its operating income 22%. Those numbers reflect Starbucks Corporation (NASDAQ:SBUX) locations only, not Seattle’s Best, Tazo Retail, Teavana, or Evolution Fresh.

While Starbucks Corporation (NASDAQ:SBUX)’s forward PE is lower than Facebook Inc (NASDAQ:FB)’s at about 24, its growth is expected to be slightly slower, resulting in a PEG of 1.6. Comparatively, Facebook Inc (NASDAQ:FB) trades at a PEG of 1.4. Facebook Inc (NASDAQ:FB) has a much smaller earnings base to grow off, so meeting analysts’ growth estimates is certainly feasible.

Considering a North American user is worth more than twice as much as a European user, and five times as much as an Asian user to Facebook, even slow user growth in the region can still have a significant impact on its revenue growth.

This concern also implies that Facebook is unable to increase the amount of revenue or profit it makes per user. That is most certainly not a static number. That would be like assuming Starbucks Corporation (NASDAQ:SBUX) can’t increase same-store sales.

Last quarter, the average revenue per user grew 12% year over year. The company saw similar growth in the prior quarter. It has done this even while the most profitable market is becoming saturated, indicating the company is finding ways to better monetize its users.

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