uploads///part

What Does Facebook’s High Price-to-Earnings Ratio in May Tell Us?

By

Jun. 10 2015, Updated 11:06 a.m. ET

About Facebook 

Facebook is a social networking channel. It had 1.39 billion users and 890 million daily active users worldwide as of December 2014. The company generates substantial revenue from advertising and fees associated with the Facebook Payments infrastructure. This enables Facebook users to purchase virtual and digital goods from developers.

In 2014, Facebook acquired WhatsApp Messenger and Oculus VR to improve its next generation of communication and computing platforms.

Article continues below advertisement

Price-to-earnings ratio of peer companies

The overall price-to-earnings (or PE) ratio of the Internet Software & Services subsector of the Technology Select Sector SPDR ETF (XLK) is 44.41x. Facebook’s (FB) PE ratio is significantly higher at 80.04x.

Other firms that are part of this subsector include Equinix (EQIX), Yahoo! (YHOO), and Akamai Technologies (AKAM). They have PE ratios of 73.97x, 43.88x, and 40.33x, respectively.

Facebook PE ratio decreases since 2012

In May 2012, Facebook was floated on NASDAQ with a stock price of $38 and had a PE ratio of approximately 80.0 x. This ratio reached an all-time high of 7930x when net income dropped to $53 million in 2012. Facebook then made regular improvements to its website and increased income through advertising revenue and mobile strategy, thereafter producing solid results.

The PE ratio decreased from 7930x, mainly due to growth in operating revenues and net income. The company’s EPS (earnings per share) also increased by 39.20% on a year-over-year basis in the trailing 12 months (or TTM).

Future outlook

Facebook’s total user base is currently 1.4 billion. That’s 20% of the world’s population. Exponential growth in user base seems unlikely. According to analysts, Facebook’s future growth will rely on marketing activities and increased user time. Facebook’s acquisitions, including WhatsApp Messenger, Instagram, and Messenger, will ensure that inorganic growth continues in the long term.

The next part of this series will cover the high PE ratio of Red Hat.

Advertisement

More From Market Realist

  • Equinox gym
    Fund Managers
    Should You Buy Palihapitiya’s IPOF Stock on Equinox Merger News?
  • Chamath Palihapitiya and Bill Ackman
    Fund Managers
    PSTH, IPOD, or IPOF: Which SPAC Is Worth a Buy Now After the Crash?
  • Man holding a piece of paper and talking with two other people
    Fund Managers
    Why Credit Suisse Is Betting on These Five Rebound Stocks
  • ARK Invest CEO Cathie Wood posing with a car
    Fund Managers
    Cathie Wood Is Buying These Under the Radar Stocks— But Should You?
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.