Facebook’s forward PE valuation
The two best valuation multiples used for valuing Internet software and services companies such as Facebook (FB) are the forward PE (price-to-earnings) and EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiples, considering the relatively stable and visible natures of their earnings.
The PE multiple represents what one share can buy for an equity investor. On April 18, 2017, Facebook was trading at a forward PE of ~39.9x, higher than PayPal’s (PYPL) forward PE multiple of ~37.0x and eBay’s (EBAY) forward PE multiple of ~5.4x.
Facebook’s forward EV-to-EBITDA valuation
The capital-intensive Internet industry has high levels of depreciation and amortization, as well as varying degrees of debt and operating leases. To neutralize these factors, we use the EV-to-EBITDA ratio to value Internet stocks. The forward EV-to-EBITDA ratio shows what investors are willing to pay for the next four quarters of a stock’s estimated EBITDA.
Facebook’s forward EV-to-EBITDA multiple was ~15.8x, higher than Alphabet’s (GOOG) ~11.4x and eBay’s (EBAY) ~11.0x. Meanwhile, integrated US Internet giants PayPal (PYPL) and Twitter (TWTR) had similar EV-to-EBITDA multiples of ~14.4x and ~14.1x, respectively.