Another metric to consider is the price to cash flow ratio, which is used to compare a company’s relative market value to its cash flow. In theory, the lower a stock’s price/cash flow ratio is, the better value that stock is.
Data by YCharts
As seen above, LinkedIn is over three times more expensive than Facebook when considering the current market price and the cash flow of the companies. Surely, investors are willing to pay more for a stock that has 100% growth and profiting nine out of every ten dollars they make, but the aforementioned statistical facts point towards a bubble, rather than a healthy company. With both companies having future cash flow expectations that are very similar, Facebook is clearly the better value here.
According to Alexa.com, LinkedIn’s time-on-site has declined 3% over the past three months and is expected to continue to drop. The company’s P/E ratio is becoming somewhat mythical, and the graphs above show that the stock is clearly overvalued. It is my conviction that LinkedIn is beginning to hit its ceiling.
Facebook however, has the ability to track personal detail leads to highly targeted ads, which is a big plus. If the company can find more ways to monetize its user base, without ticking off its users, the potential is unlimited, and the ceiling is non-existent. The stock also just recently surpassed its IPO price, a big milestone that many corporations never achieve.
As Warren Buffett once said, “The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money.”
LinkedIn is virtually working with effortless money, and if investors want to find a stock that is just starting to come into its own, at a healthy price, I wouldn’t recommend looking at this professional network. The same is true for Monster. If you are in investing in this space, Facebook provides the better value.
The article LinkedIn vs. Facebook: Why Facebook Wins the Battle originally appeared on Fool.com and is written by Chris Johnson.
Chris Johnson has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn.
Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.