Why Facebook shows strong growth but the stock is still expensive



Facebook’s Q1 earnings beat Wall Street expectations

Facebook (FB) reported better-than-expected earnings in the first quarter of 2014, beating Wall Street expectations in terms of revenues growth and EPS (earnings per share). Facebook’s revenue in Q1 2014 was $2.5 billion, which was up 72% versus Q1 last year. This number easily beat analysts’ expectation of 60% year-over-year growth. Similarly, Facebook’s EPS of 34 cents per share easily beat analysts’ expectation of 24 cents per share. Facebook attributed this success to capitalizing on the shift to mobile, growing the number of marketers who advertise with Facebook, and investing in its ad products.

Facebook PE Ratios

Facebook’s showing strong growth but the stock is still expensive

Although the overall tech sector has undergone some correction in the last few days, Facebook stock is still quite expensive when we compare its P/E (price-to-earnings) ratio with its competitors. As the above chart shows, Facebook’s P/E of 72.6 is way too high compared to that of Google (GOOG) and Yahoo (YHOO). Facebook’s other competitors in the social media space, Twitter (TWTR) and LinkedIn (LNKD), have negative earnings and so their P/E ratios are meaningless.

Facebook’s recent investments aren’t expected to give returns any time soon

Facebook  has made a number of acquisitions in the past, which includes the mobile instant messaging app WhatsApp for $19 billion, virtual reality company Oculus VR for $2 billion, and photo sharing app Instagram for $1 billion. However, none of these acquisitions are expected to contribute to Facebook’s revenue growth any time soon. Facebook hasn’t announced any plans to monetize WhatsApp, while the virtual reality market isn’t expected to pick up for another five years.

With regards to Instagram, during the conference call to announce Q1 earnings, Facebook’s management admitted that it’s currently focusing on ramping up Instagram’s user base rather than monetizing it. Similarly, Facebook’s management mentioned that it won’t see any material contribution from video ads this year. Plus, Facebook is currently in the early testing phase of its own ad network.

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