Facebook and Twitter’s Valuations Are Baffling

Facebook and Twitter’s Valuations Are Baffling

Some smart analysts recently urged calm about the eye-popping stock market values of a handful of U.S. technology superstars, including Apple Inc. and Amazon.com Inc. As for Twitter, its stock price has tended to be discounted to its more successful rival, Facebook. This valuation gap started to shrink late last year, and briefly flipped during Facebook's Cambridge Analytica crisis in March — to the point where, for the first time, Alphabet's stock was consistently more expensive than Facebook's relative to the companies' profits. On the same measure, perennial crazily valued Amazon is trading at 221 times its trailing net income. While Twitter trades at 55 times its Ebitda for the past 12 months, Facebook investors are paying 21 times. But the rapidly climbing stock means Twitter's market value already reflects expectations of the company becoming both significantly more profitable, and rebounding from the days of shrinking revenue. Even if Twitter gets there, how much more can its valuation, and therefore its share price, keep rising? For Twitter, not so much. For the completists among you: Twitter's enterprise value is 28 times its forward Ebitda estimates, according to Bloomberg data. Facebook is at 15.

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You’re about to read about technology stocks, but don’t expect to see a mention of the “B” word (for “bubble”).

Some smart analysts recently urged calm about the eye-popping stock market values of a handful of U.S. technology superstars, including Apple Inc. and Amazon.com Inc. The gist is that their lofty share prices don’t indicate a worrisome, late 1990s-like overvaluation, but largely reflect these companies’ rapidly climbing earnings and cash flow.

But just because the big tech stocks collectively aren’t in a “B” word, that doesn’t mean there aren’t weird things happening with individual company valuations. I want to point out two oddities, Facebook Inc. and Twitter Inc.

The short version: Investors have always paid more to own a share of Facebook’s future profits than they did for a slice of Google parent Alphabet Inc. Now they’re not. As for Twitter, its stock price has tended to be discounted to its more successful rival, Facebook. And now it’s not.

The chart above shows Facebook and Google shares compared with their forecasted annual earnings over time. You can see that until recently, stock buyers were willing to pay a lot more for each dollar of Facebook’s earnings than they were for Google’s. There were good reasons. Facebook is growing twice as fast as Alphabet, and its profit margins are bigger. People are willing to pay a premium figuring that Facebook has more opportunity to grow revenue and earnings.

This valuation gap started to shrink late last year, and briefly flipped during Facebook’s Cambridge Analytica crisis in March — to the point where, for the first time, Alphabet’s stock was consistently more expensive than Facebook’s relative to the companies’ profits. Different measures of earnings also show narrowing valuation gaps.

Facebook’s ebbing valuation is due in part to concerns — encapsulated by the controversy over Facebook data harvested by Cambridge Analytica — that the company will have its wings clipped by regulators or that its profits will be crimped by…

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