On the surface I find this absolutely ridiculous as Disney has one of the most valuable collections of entertainment assets ever assembled. I get the allure of Facebook with its billions of users and dominant position in social media. I use Facebook and think it's a pretty good website but I cannot see that it is as valuable as Disney.
The market cap of both companies is $125 to $130 billion right now. For that sum of money I could easily create a business that runs Facebook off the social media map. I doubt, however, that I could even get a start at replacing Disney with its iconic characters, movies, parks and other assets.
Ben Graham famously said that investing was most successful when it was most businesslike. Let's pause for a moment and look at some choices with the $125 billion that Facebook is worth in the stock market right now. The conventional argument is that you are paying for the growth potential of the company, and that is what makes it worth the staggering market cap it has at the moment. I find that statement some what ludicrous but for a moment let's say that is valid.
The always highly-accurate analysts think that Facebook can grow earnings at around 35% to 30%. For that you are paying 93x current earnings and almost 50x the estimates for the next 12 months.
I wonder if there is anything with similar earnings growth potential we can buy with the same money that makes more sense from a business point of view. We could buy all of SunTrust Bank (STI) with the money. The bank has more than 1,600 branches in the Southeast and is projected to grow earnings at more than 25% over the next five years. I would rather own that banking operation than Facebook as a business, but SunTrust is only going to cost me about $19 billion. I have a lot of money left to spend. I like the Southeast a lot so I will go ahead and add Regions Financial (RF) to my conglomerate for another $13 billion and become the biggest bank in the South.
Looking over the next decade, homebuilding may actually be a decent business to be in as the world recovers. I want to be a big player in the industry so I will buy Toll Brothers (TOL),DH Horton (DHI), NVR (NVR), Meritage Homes (MTH) and become the dominate builder in the U.S. That takes care of another $18 billion. They all have projected growth rates in excess of 20% annually.
My wife and I like to shoot and go to the range from time to time for a little target shooting. She is a much better shot than I am, but I still enjoy the sport. I like it so much I am going into the firearms business and buy Storm Ruger (RGR) and Smith and Wesson (SWHC) to form one of the biggest firearms companies in the United States. That costs me an additional $2.5 billion. Again, both companies have anticipated growth rates north of 20% for the next five years.
So far I have spent about $50 billion to own one of the largest banks in the United States with an absolutely dominant market share in the southern portion of the country, the largest homebuilder in the country as well, as a dominant position in the firearms industry. I still have more than $70 billion to spend to match the market cap of Facebook right now.
I am not much of a shopper. But my wife and daughters are pretty good at it, so I know the power of certain brands in the market place. I think I will stay on top of women's spending trends and add Michael Kors (KORS), Ulta Salon (ULTA) and Lululemon (LULU) to my Facebook Replacement Conglomerate. Rather than leave the men out, I will snap up Under Armour (UA) as well. They all have similar growth potential to the social media giant and this spends an additional $35 billion.
Travel and entertainment should be a pretty good business over the next decade and many of the companies have high projected growth rates. So I think I will enter that industry as well by buying all of Hyatt (H), Hertz (HTZ), Six Flags (SIX) and Cedar Fair LP (FUN). That will take up about another $20 billion or so of our replacement fund.
For the value of Facebook I now have a conglomerate that is the dominant bank, homebuilder, fashion retailer, travel and entertainment and firearms company in the world. I also still have $10 billion, or so, left in cash. If they earn that, analysts expect them to generate earnings of $6.538 billion over the next year. That will compare to Facebook's $2.66 billion. They all have very high five-year projected growth rates that should at least come close to matching which will exceed the social media giants' growth rates.
To suggest that buying a high multiple stock like Facebook can be justified by the potential growth rate simply does not hold up when viewed from a more business-like point of view.