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.
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.
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).
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.