By now everyone has heard of the enormous market loss suffered by Facebook, Inc. (NASDAQ:FB) a couple of weeks ago. However, beyond knocking the embattled social media platform both for its stock performance and for its recent (very) bad publicity, few Canadian analysts seem to be hyping the value opportunity the above factors now present.
Perhaps that’s because the value opportunity is more of a trap. however. Then again, perhaps that so-called value isn’t deep enough. Let’s take a look at how the famous American time vampire is doing as a ticker and look at a modest Canadian competitor for space in your tech investment portfolio.
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Overvalued by 57% compared to its future cash flow value, Facebook is exhibiting some pretty clear signs of poor value today. A P/E of 27.9 times earnings isn’t bad for the U.S. tech market, and is surprisingly lower than what I was expecting. In fact, losing hundreds of billions of dollars off its market value doesn’t seem to have done as much harm to Facebook as it perhaps should have.
A PEG of twice growth and a P/B of 6.7 times book are further evidence of this overvaluation, with neither ratio representing good value for the industry, or for the NASDAQ. However, this is an improvement on the stock’s previous overvaluation. The question is whether it’s enough of an improvement to make this stock a buy.
A 13.9% expected annual growth in earnings actually seems generous given that everybody who was ever going to have Facebook is probably using it by now. This growth, while low, may suggest that there is more data yet to be squeezed from Facebook’s users. Expecting a return on equity of 23.1% over the next one to three years, analysts peg Facebook as a winner for some time yet to come, making efficient use of shareholders’ funds.
Your all-Canadian tech competitor
If you like FAANG stocks, but would rather stick to some tried and tested homegrown stocks, why not consider OpenText (TSX: OTEX)(NYSE:OTEX)? OpenText produces and markets software solutions for making business information sharing more streamlined when moving across hardware platforms. One of the best Canadian alternatives to your common or garden FAANG stocks, OpenText is a sturdy and profitable ticker just right for your tech portfolio.
Currently discounted by 37% against its future cash flow value, OpenText is even better value than when I last reviewed it, making it one of the best-priced DOCKS stocks (Canada’s answer to the FAANGs). When you compare it with the sector average of 54.8 times earnings, OpenText’s P/E of 43.2 times earnings is not bad value for a TSX software stock. OpenText’s PEG of 2.8 times growth has jumped to match its P/B of 2.8 times book, though only the latter beats the sector average.
A 15.6% expected annual growth in earnings is a contraction of last month’s estimate, and suggests that the sector may be facing some pressure on the back of Facebook’s recent plunge, though could equally indicate a broader economic slowdown. Speaking of Facebook, OpenText has the edge here, with a dividend yield of 1.63% compared to Facebook’s lack of a payout altogether.
The bottom line
Ordinarily, I wouldn’t look twice at a stock that has just tanked this hard, but Facebook is still something special. It continues to have the monopoly on Western users of social media (I say “Western,” since there are some very solid Asian contenders for the market), and isn’t going anywhere as a platform, or as a target for advertisers. However, growth does indeed seem to have slowed, and overall the stock is still too expensive.
