Is Facebook ($FB) Really Worth 15% More Than Amazon ($AMZN)?

If you needed more proof that there is another bubble forming in Silicon Valley 15 years after the last one ended badly, how about this headline:

“Facebook to acquire WhatsApp for $19 billion”

This announcement makes the Facebook ($FB) deal to buy Instagram for $1 billion in 2012 look like the biggest bargain in U.S. corporate merger and acquisition history. Maybe the Snapchat guys were smart to turn down the $3 billion Mark Zuckerberg offered them. Their asking price is probably $10 billion now and they just may get it now. All of the sudden the debate over whether Twitter ($TWTR) is worth $40 billion with only $1 billion in annual revenue takes a back seat. Now WhatsApp, a company many people have never heard of, is in some eyes worth half that price without a penny of revenue (Correction at 5:05pm PT: The WhatsApp app is free for the first year, then users pay $0.99 per year, so they technically do have revenue, although 8 cents per month is not material in my mind).

Rather than debate whether startups without fully formed business models are worth tens of billions of dollars, the more interesting thing to me is that Facebook’s current market value is now $185 billion after you add in the $15 billion of new stock they are giving WhatsApp (along with $4 billion in cash). Amazon ($AMZN), after its recent post-earnings report decline, has an market value of just $160 billion.

I might be completely wrong about this, but if I had to pick one of those stocks at those prices for the next 5 years, I’d take Amazon over Facebook in a heartbeat, even ignoring the fact that I would be getting it at a discount. I just don’t think Facebook usage five years from now will be as high as it is today. They seem to share this view, based on their recent buying spree, which has resulted in them targeting competing apps that they intend to operate completely separately from the Facebook platform.

Essentially, it’s an “app grab” and they have plenty of money and equity-raising ability to pay huge amounts in order to place bets on which apps will dominate in the future. Given how fast consumers’ technology preferences change (if you looked at the top 10 most visited web sites from 10 years ago you would giggle), I think it will be really hard to know which apps will be long-term winners. And paying $19 billion for one seems truly remarkable to me.

Along those lines, for investors looking for a way to play their opinions on how these kinds of things play out longer term, I think you can make some interesting bets using paired trades to reduce your market risk. For instance, getting Amazon for a 15% discount to Facebook looks intriguing to me, and I am putting a little money on that paired trade; short Facebook, long Amazon. It’s a market-neutral bet that simply is a play on Amazon narrowing that valuation gap, and quite possibly overtaking Facebook, in the next, say, 3 to 5 years.

Now, I could be completely wrong here (and in technology it’s easier to be wrong than in other industries), but right now I just think the sentiment has shifted so much lately (to Facebook and away from Amazon, though not for the same reasons), that I’m willing to put a little money on the line. It wasn’t that long ago that Faecbook was written off shortly after its disasterous IPO and after a mediocre holiday quarter (in the eyes of some anyway), Amazon shares have dropped 60 points in short order.

From hero, to goat, to hero again, in less than 2 years...
Facebook: from hero, to goat, to hero again, in two short years…
Concerns about Amazon's low profit margins seem to be moot after the WhatsApp deal...
Concerned about Amazon’s low profit margins? $19B for WhatsApp has to help…

 

Full Disclosure: Long Amazon and short Facebook at the time of writing, but positions may change at any time