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Buy Apple and Google, Wait On Facebook, Stay Away From Zynga

Facebook will need to stay sharp if the price of the stock is to break above $40. Facebook is projected to make about $1.5 billion in fiscal year 2013, up from $1 billion this year. If Facebook makes $5.45 billion, at $40 a share the price-to-earnings multiple will be "only" 20. In comparison, Apple's (AAPL - Get Report) price-to-earnings multiple is reasonably under 12. If Apple traded with the same multiple as Facebook, it would trade near $2,600 a share.

Google (GOOG - Get Report) is Facebook's largest direct competitor based on a market cap at $200 billion. Google also has a solid history of earnings and industry position. Google has its big toe into the social space and is expected to go in further if it's profitable. Like Apple, Google's price-to-earnings multiple is much lower, near 14. If Google traded for the same multiple as Facebook, Google's trading price would be near $2,400 a share.

Unlike Google and Apple, for Facebook to have a $40 share price and a price-to-earnings multiple of 20, investors will expect Facebook to continue to grow. The reason Facebook's shares are not moving up beyond $40 is that the smart money has looked at the numbers and is bailing out. Facebook is not a start-up just about to take off with 10-times profit growth expected in the next five years.

Zynga (ZNGA - Get Report) is more or less an unmitigated train wreck. It may not only have peaked, but if they don't figure out how to make a dollar soon, investor confidence will leave shortly after. Investors need to view Zynga as a giant red flag. (Think in terms of the Chinese red flags during the Beijing Olympics without the gold stars and you get the picture.)

Facebook charges Zynga about 30% for revenue brought in when players buy "needed" items for their virtual farms or other settings for Zynga's online games. As long as Zynga isn't making a lot of money (meaning none) Facebook faces a relative lack of motivated companies to rush in to get a part of it. Zynga also advertises on Facebook to drive customers to Zynga products.

Zynga needs Facebook more than Facebook needs Zynga. Look for Zynga to negotiate a better contract to bring Zynga at least to break-even. I don't expect Zynga to perform better than break-even, though, because of Facebook's positional advantage.

If you want exposure within the Internet and social space, don't look for Zynga and Facebook to fill your portfolio with riches. Apple and Google may not be new and as sexy as the "latest thing," but they're both innovative, priced for the average investor to make money and are as likely to be standing after Facebook and Zynga are gone.

I am bullish with Apple and Google, will wait for a lower price with Facebook and won't touch Zynga -- except maybe to short it.
Author does not hold a position in any stock mentioned.
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