Facebook Is on Pace to Be Larger Than Google

By Markets Fool.com

Image source: Facebook, Inc.

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One company's mission is to connect the world. The other's is to organize the world's information. While Facebook, Inc. (NASDAQ: FB) is a social network and Google is primarily a search engine, both companies have the same objective -- capture your attention and keep it as long as possible.

Both have been successful at doing just that. In July, Facebook announced its Messenger service reached a billion users, joining WhatsApp and Facebook in reaching the astonishing milestone. It may just be a matter of time before Instagram, which is currently at 500 million users, achieves the same success. Meanwhile, Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary Google has six products that have achieved the billion-user mark -- YouTube, Android, Search, Maps, Chrome, and Google Play.

As a result of its ability to play such a critical role in the daily lives of people around the globe, Google has become the second largest company in the United States. Depending on the mood of the market, Facebook can be anywhere between fourth and seventh. Facebook still has a long way to go to catch Google. The social network lags Google in terms of revenue and market capitalization by about $60 billion and $173 billion, respectively. However, given that Facebook was founded only 12 years ago, it's not out of the picture that it can catch up to its Silicon Valley counterpart, which has been in existence since 1998.

A journey through time

The age gap between the two companies is six years, and it was just over six years ago that Google was doing the same amount of business as Facebook today. In fact, the numbers are remarkably similar.

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Metric

Facebook (TTM)

Google, FY 2009

Revenue

$22.6 billion

$23.7 billion

Net income

$6.0 billion

$6.5 billion

Advertising as % of total revenue

96.5%

98.9%

Data source: company filings.

Despite the similarities, there are a few major differences too. Facebook is currently worth $357 billion, while Google at the end of 2009 was worth just under $200 billion. The premium that Facebook commands can be attributed to two factors. First, the market overall is in a better place today than it was in 2009, when it was just beginning to recover from the financial crisis. Second, which is what excites me the most about Facebook's prospects, is that it is growing at a much faster rate than Google at that time.

Over its past 12 months, Facebook has grown revenue and net income 51% and 85%, respectively, over the previous 12 months. In 2017, analysts expect Facebook to grow revenue by 35% and net income another 73% over 2016. In 2010, Google grew revenue and income at 24% and 28%, respectively.

Despite weaker growth than Facebook in 2010, what Google has done since has been remarkable. From 2010 to 2015, Google grew revenue at an annual clip of 21% while growing net income 17% per year. In its latest quarter, Google was even able to accelerate its growth.

Metric

Three Months Ended June 30, 2015

Three Months Ended June 30, 2016

Revenues

$17,727

$21,500

Increase in revenues year over year

11%

21%

GAAP net income

$3,931

$4,877

Increase in net income year over year

17%

24%

Source: company filings.

A company with a value over half a trillion dollars is not supposed to grow its top and bottom lines over 20%. However, Google has done just that.

Maintaining growth

As Facebook gets larger, the law of large numbers will come into play and its growth will decelerate. However, it may be able to achieve what Google has and then some. According to Facebook management, overall ad growth today is still driven by Facebook. That growth doesn't appear to be slowing. Despite having 1.7 billion monthly active users on Facebook, the company was still able to grow its user base by 200 million people over the prior year.

While the company isn't done growing its main platform, it has yet to meaningfully monetize Instagram, WhatsApp, and Messenger. It wasn't long ago when investors doubted the company's ability to monetize Facebook. The same doubt crossed investors' minds when consumer behavior aggressively shifted to mobile. With the stock up 27% over the past year and over 200% in three years, it appears investors aren't making the mistake of doubting Facebook again.

What will it take to catch Google?

Since its IPO in May 2012, Facebook stock is up 225%. If it was to grow that much from this point, it would be an $800 billion company. Twenty years ago, the largest company in the world was General Electric (NYSE: GE) at $136 billion. It was likely unfathomable to picture a $500 billion company at that time. Today, Apple (NASDAQ: AAPL) and Google have both reached that milestone. It was just two years ago that the former was a $775 billion company and on its way to becoming the world's first trillion-dollar company. It's not out of the realm of possibility that Facebook could grow another 225%. However, investors shouldn't expect that growth to occur to happen over the next four years as it has the last four.

Let's look at a more realistic scenario. It was just over six years ago that Google was a mirror image of Facebook today. If Facebook, six years from now, can get to where Google is today, it will be worth about $540 billion. This translates to about 51% returns or just over 7% annualized.

Given Facebook's mission to connect the world and its ability to create products that attract billions of people every day, reaching Google's heights looks like a very real possibility.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Palbir Nijjar owns shares of Alphabet (C shares),Apple, and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Facebook. The Motley Fool owns shares of General Electric and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.