In the lead-up to today's much-anticipated and much-hyped IPO of Facebook (FB), the company's valuation and prospects have been discussed to death throughout the web and blogosphere. I will not add my opinion on whether I believe Facebook is fairly valued. It's a hugely successful company and will continue to be -- what the stock price will do is another matter.
I am more interested in what companies could benefit by Facebook's continued growth and dominance in social media. Here are two undervalued firms that will benefit on the margins from this social media juggernaut.
EMC (EMC) offers enterprise storage systems and software throughout the world. It is one of the largest players in the storage space. The amount of data is increasing exponentially, thanks to services such as Facebook, which consistently collect and add to the amount of information coming from the web. Companies have a growing need to store, manage and analyze this data to better reach their customers. EMC offers the hardware and software to meet this growing need.
Here are four reasons why EMC is undervalued at $25 a share:
- EMC has a robust balance sheet with about $4.7 billion in net cash on the books. It also owns 80% of VMWare (VMW), a stake that's worth another $34 billion. Take those two items out, and EMC's core storage and software business is valued at less than $15 billion by the market.
- The stock is selling for just 12.7x forward earnings, a discount to its five-year average (17.4x), and it has a five-year projected price-to-earnings-to-growth ratio of just 1.
- Analysts expect solid growth out of the company for the next couple of years. Projections call for 11% revenue growth in both fiscal 2012 and fiscal 2013.
- The 29 analysts who cover the stock have a median price target of $33. Standard & Poor's has its highest rating, Strong Buy, and a $36 price target on the stock.
Microsoft (MSFT) has had an ongoing and evolving relationship with Facebook for quite some time:
- Microsoft held talks with Facebook several years ago about acquiring the entire company.
- Instead, Microsoft made an early investment and took a stake in Facebook.
- Microsoft has started to integrate Facebook's social data into its search queries.
- A year ago, Microsoft sent out feelers to see if Facebook wanted to buy its Bing search technology platform.
- Facebook incorporated Microsoft's recently purchased Skype technology into its customer platform.
- This week, Microsoft took its $1 billion patent portfolio it just purchased from AOL (AOL) and sold 650 of those patents to Facebook for $550 million and agreed to give Facebook rights to the 275 patents that Microsoft retained.
Obviously, a potential game-changer would be if Facebook bought Bing and used its social data to build a better search engine to challenge Google (GOOG) directly. This would also free Microsoft from a business that loses more than $2 billion annually. Microsoft could retain a stake in this business and/or take additional Facebook stock.
Here are four reasons why Microsoft is a bargain at under $30 a share:
- The company sports a rare AAA-rated balance sheet, yields 2.7% and sells for around 8x operating cash flow.
- The stock is selling at under 10x forward earnings, a discount to its five-year average of 12.7x
- The stock should get a nice boost when Windows 8 rolls out by the end of the year, and consensus estimates for fiscal 2012 and fiscal 2013 have been bumped up in the last month.
- The median analyst price target on Microsoft is $36 a share, 20% above the current stock price. Credit Suisse has an Outperform rating and moved up its price target to $38 from $34 in April.