Why You Should Dump Facebook and Buy Apple

Tickers in this article: AAPL FB

By Ed Ponsi, RealMoney

NEW YORK (RealMoney) -- On Friday, Apple (AAPL) closed at an all-time high of $648, and Facebook (FB) closed at its all-time low of $19.05. Over the weekend, this prompted a question from one casual stock-market observer: Is it time to sell Apple, which now seems overpriced, and buy Facebook, which seems cheap in comparison?

I told him no. In fact, I gave him the exact opposite advice -- sell Facebook and buy Apple.

Both companies are expected to grow rapidly over the next five years, with Apple's annual earnings expected to grow by 23% and Facebook targeted at 27%. I believe Facebook's estimates are overly optimistic, however, for reasons that are about to become clear.

Even after being halved since its initial public offering, Facebook shares are trading at 30x next year's earnings. But Apple, after experiencing a sevenfold increase in price, is trading at only 13x next year's earnings. Facebook's price-to-earnings to growth ratio is 1.59x, while Apple's PEG ratio is 0.66. In other words, even at Friday's closing prices, Facebook's anticipated growth is about 2.4x more expensive than Apple's.

There's no justification for this disparity in valuations, as these companies are headed in opposite directions. Apple has new products on the horizon that are bound delight their customers. The next iteration of the iPhone is now expected in September, and it could be the biggest handset launch of all time. The iPhone now accounts for the majority of Apple's revenue and profits.

Meanwhile, what does Facebook have on deck for its investors? Another 1.3 billion shares may be dumped on the market before year-end as insiders finally get their chance to exit. This doesn't change the company fundamentally, but it does invoke the law of supply and demand. There isn't much demand for Facebook shares now, and there is about to be a considerable increase in supply.   

Apple is responsive to its customers. For example, Siri is an incredible voice-recognition advancement that puts Apple ahead of its competitors, yet the company is dissatisfied with the product and focused on making it better. Facebook, on the other hand, is completely tone deaf to the concerns of its users. The unpopular timeline feature is now being forced on its entire user base, some of whom are abandoning the social network.

Facebook is contemplating placing advertisements directly in the user's newsfeed, instead of in their usual location, off to the side. Some analysts are excited by this development, as they believe this will be one of the keys to driving revenue, going forward.

Will placing ads directly in the newsfeed inspire the same loyalty and delight from Facebook users that Apple enjoys? Or will it irritate and drive away the very consumers they target? Remember, Apple customers make a serious financial commitment to the company. iPhones, iPads and MacBooks aren't cheap, and customers who purchase them are unlikely to switch to a competing product on a whim.

Meanwhile, Facebook users have no skin in the game -- they make absolutely no financial commitment to the company. Users can switch to Twitter on a whim, at no cost whatsoever, in a moment.

Facebook has already made mistakes, and it might be on the verge of a big one. The company doesn't seem to know or care what its users want, and monetizing users will continue to difficult, because they don't log on to Facebook to buy things. The company is priced for perfection, and it could easily disappoint on earnings and revenues.

Meanwhile, Apple is focused like a laser, consistently raising the bar and wowing its customers, and driving competitors like Research In Motion (RIMM) to the brink of extinction.  Even when the company hits a bump and disappoints on earnings, the stock's reasonable valuation prevents the price from falling too far. That's why even after the massive move higher in its shares, Apple is still a better deal than a half-priced Facebook.

At the time of publication, Ponsi was long AAPL.

Tickers in this article: AAPL FB