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Ford Is a Better Investment Than Facebook

Ford's (F) stock encountered a patch of ice on Friday and slid nearly 5%. News of Europe's woes impacting Ford's profitability was not well received.

Surely weakness in European vehicle sales didn't catch that many by surprise. Instead it seemed Europe's economy circling the drain became the catalyst for a knee jerk reaction for many to liquidate shares in Ford with total disregard of value.

Apparently some investors didn't notice that the perspective shift in places like Greece, Spain, and soon France, based on their last election. Of course, the selloff could be as much a market signal to Ford to "get it together" in Europe. An unlikely message, considering Ford CEO Alan Mulally ranks as one of my top 10 CEOs in the world. Ford under Mulally's leadership destroyed GM (GM) and Chrysler, while positioning Ford as the last man standing during the auto crisis.

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Ford is bigger than GM. GM has long been considered the bigger of the two companies. From a company valuation point of view, Ford is the bigger company with a market cap of $36.6 billion vs. GM's valuation of $30.8 billion. Granted, GM sells more vehicles and has greater revenue; however, Ford makes more money. In my book, the company that makes the most money is the biggest company. Even without using earnings as the benchmark, market cap is still more important than the number of sales.

Compare with Facebook

Entirely too much investor attention was paid to the recent IPOs of Zynga (ZNGA) and subsequently Facebook (FB). Zynga has a crucial relationship (closer to dependence) with Facebook and has publicly traded much longer, making them an important bellwether for the social networking giant.

I have written about Zynga before (see my articles Oops, I Did It Again: Facebook and Zynga Hit New Lows and How to Catch a Falling Knife) and the best thing I can say about the stock is if they deliver a strong beat, the amount of short interest may create a short-seller squeeze.

Short interest peaked on the May 15 reporting date at 56.6 million shares. Short interest has backed off since the peak at 38.7 million shares, but well above the average during 2012. Short interest is a key metric that investors should follow because short sellers are generally the shrewdest guys in the room.

Short sellers lived up to their reputations with Zynga as well. Since opening up publicly, Zynga shares have tumbled about 50% in value. Not a bad return for short sellers in less than a year.

For Facebook, Zynga's troubles are Facebook troubles as Zynga accounts for a large proportion of Facebook's revenue. In many ways, Zynga is to Facebook as Europe is to Ford.

Zynga produces income for Facebook and Europe is currently losing money for Ford, so the similarities are not totally parallel. But Zynga doesn't want to pay as much as they are paying to Facebook, at least not in terms of future growth.

For Zynga to be considered anything more than a method for Facebook to monetize its traffic, Zynga needs to develop a website that is capable of doing more than advertising for Facebook.TheStreet's Robert Lang wrote a valuable Real Money Pro article about Facebook and JPMorgan (JPM) titled Blow the Whistle. (You need a Real Money Pro subscription, but if you don't have one take a look at the free trial offer so you can read it.)

To Facebook's credit, it has successfully convinced Zynga that Zynga's purpose is to promote Facebook. But unlike Google (GOOG) and Yahoo (YHOO), Facebook doesn't have a strong history of monetizing Web traffic. Google is laying the foundation for a social network and Yahoo has offered social games for years. Potential Zynga players entering through Zynga's website still must enter through the Facebook door.

Zynga's investors have to conjecture why Zynga doesn't have games accessible through Zynga's website without a third party (Facebook) website keeping score. Expect this situation to change as Zynga figures out if they want to add shareholder value they will requisite a standalone product. A smarter Zynga means a less profitable Facebook.

A mountain was made out of a molehill regarding GM leaving Facebook as an advertiser. As large as GM is, it's still only a relatively small amount of the total opportunity for Facebook. By the very nature of Facebook, one would expect advertisers to come and go as if through a rotating door. It makes sense for large companies to determine the real world ROI they receive for their ad spend.

John Wanamaker opened up Philadelphia's first department store, called "The Grand Depot," in 1875. Those in the marketing business may know one of his famous passages "Half the money I spend on advertising is wasted; the trouble is I don't know which half. " Internet advertising has brought a whole new level of metrics in calculating ROI.

Knowing which half is working and which half is not is much easier in the online world. Targeting your ads toward the most likely demographics creates a whole new level in advertising efficiency.

Unlike Google and Yahoo advertising, companies like GM and Ford can create pages with the look and feel of a total advertisement for free.

With Google and Yahoo, the best a company can hope to receive for free is good placement with a couple of lines of text. Facebook offers a lot more for free. Can a social network website with slowing growth really justify a multiple above 50?

A price-to-earnings multiple of 50 means Facebook will take 50 years of earnings to pay for one share of stock. Facebook doesn't have a multiple of 50 for the last year. The trailing 12 months earnings multiple is over 70.

Ford, on the other hand, sports a price-to-earnings ratio under 10 and that is after factoring in the costs of building out an expansion into China. Facebook may gain entry into the Chinese market in the future, but the fact remains Ford is moving full speed ahead and Facebook is out in the cold.

Higher taxes starting in 2013 will hurt both companies in America as the economy shifts large amounts of money from other sectors into the health sector. America is the largest source of profits for both, but soon China will add to Ford's revenue and profits.

With profit potential greater than America, China offers Ford the ability to grow at a faster rate overall than Facebook. Forward-looking profit potential, along with a dividend over 2%, makes Ford a better investment choice.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage

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