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FWIW, looks like FB still has a P/E of 62. That's high, but could be much higher. For reference, however, Google is at 20. P/E is certainly not the only number

FWIW, looks like FB still has a P/E of 62. That's high, but could be much higher. For reference, however, Google is at 20. P/E is certainly not the only number that matters, but I think the two companies have a lot in common re: their major profit sources, and it suggests FB has quite a bit of room to go down more if they don't turn things around with eg an especially good quarter.

xxpor 14y ago
In terms of their profit centers, there's a fundamental difference in the type of advertising they do. Fb does demographic based ads, while google does ads based on what people are searching for RIGHT NOW. 99% of the time, google style advertising is worth more.
ramblerman 14y ago
Am I correct in understanding that as, for 62 dollars worth of shares I buy 1 dollar of the earnings?
- WiseWeasel 14y ago
  No; for $62 of shares, you buy $62 of shares. The Price-to-Earnings ratio is the ratio of the total outstanding share value to the company's income in the previous year. Facebook's income in 2011 was $1B. At the IPO share price of $38, the value of the total outstanding shares was around $100B, giving them a P/E ratio of 100 ($100B / $1B = 100). Now that the share price has fallen by half, the P/E ratio is closer to 50. The P/E ratio is used to give an indication of how highly a company's stock is valued in relation to the profit they make. Companies with a high P/E ratio are typically expected by shareholders to report higher profits in the future. Those with a low ratio are expected to remain flat or contract. For high-growth companies, like triple-digit growth, a P/E ratio between 50-100 is not unheard of, but is relatively high, and an indication of an exceptionally high degree of confidence in the company. A ratio in the 20-40 range is more common for growing companies. 10 and under typically indicates a relative lack of faith in growth prospects by investors. There are many more factors to consider than relation to last year's profits when determining the value of a stock, but this is a very commonly used metric.
- dave_sullivan 14y ago
  Yes, that's the general idea. Your $62 today theoretically gives you some right to $1 per year of earnings + every other year after that, taking into account earnings growth (So, the case for high P/E ratios is that earnings growth will be fast enough that that $1 quickly turns into $2 each year) Apple's P/E, for more comparison, is at 16. But more specifically, since facebook doesn't pay a dividend, you won't see that $1 each year because Facebook will re-invest their earnings into their business. You're essentially saying that facebook will invest that $1 into growing their earnings faster than you could generate a similar return by investing in something else. When a company reaches a point where the market is mature and further investment will likely not result in a earnings growth rate that beats similar alternative investments, it pays a dividend and the stock actually becomes a cash stream, which you can then re-invest or spend freely.
- marvin 14y ago
  Yes. A P/E rate this high implies that the market believes Facebook will considerably increase its earnings in the future. The lower P/E ratio of Google and Apple implies that the market does not believe in significant earnings growth in the future. You rarely buy a stock looking only at the company's present situation. For instance, Ford for a long time had a price/assets value smaller than 1, which meant that one dollar of Ford stock gave you more than 1 dollar's worth of Ford's assets. But during this time, Ford was also losing a lot of money.
rm999 14y ago
You're looking at the trailing P/E, which looks at the past four quarters of earnings, but for fast growing companies investors tend to use the forward P/E, which is based on estimates of the next four quarters. FB's forward P/E is 29, google's is 14. Neither estimate is perfect, but the forward P/E tends to take expected growth into account much more effectively.
- gfodor 14y ago
  Forward P/E is particularly bad in this case though since it's hard to have much confidence in forward earnings estimates for FB since analysts know nearly nothing about it yet.
calvinlough 14y ago
Google Finance says the P/E is 100. I don't know enough about this stuff to say whether 62 or 100 is right. Does anyone know which value is right? Where did you find the value 62?
- tedunangst 14y ago
  Trailing (previous results) vs forward (projected results).
majani 14y ago
I think that's been a big problem with this stock: people using wrong comparables. Facebook's product is much more similar to Yahoo/AOL than Google.

xxpor 14y ago

In terms of their profit centers, there's a fundamental difference in the type of advertising they do. Fb does demographic based ads, while google does ads based on what people are searching for RIGHT NOW. 99% of the time, google style advertising is worth more.

ramblerman 14y ago

Am I correct in understanding that as, for 62 dollars worth of shares I buy 1 dollar of the earnings?

WiseWeasel 14y ago
No; for $62 of shares, you buy $62 of shares. The Price-to-Earnings ratio is the ratio of the total outstanding share value to the company's income in the previous year. Facebook's income in 2011 was $1B. At the IPO share price of $38, the value of the total outstanding shares was around $100B, giving them a P/E ratio of 100 ($100B / $1B = 100). Now that the share price has fallen by half, the P/E ratio is closer to 50. The P/E ratio is used to give an indication of how highly a company's stock is valued in relation to the profit they make. Companies with a high P/E ratio are typically expected by shareholders to report higher profits in the future. Those with a low ratio are expected to remain flat or contract. For high-growth companies, like triple-digit growth, a P/E ratio between 50-100 is not unheard of, but is relatively high, and an indication of an exceptionally high degree of confidence in the company. A ratio in the 20-40 range is more common for growing companies. 10 and under typically indicates a relative lack of faith in growth prospects by investors. There are many more factors to consider than relation to last year's profits when determining the value of a stock, but this is a very commonly used metric.
dave_sullivan 14y ago
Yes, that's the general idea. Your $62 today theoretically gives you some right to $1 per year of earnings + every other year after that, taking into account earnings growth (So, the case for high P/E ratios is that earnings growth will be fast enough that that $1 quickly turns into $2 each year) Apple's P/E, for more comparison, is at 16. But more specifically, since facebook doesn't pay a dividend, you won't see that $1 each year because Facebook will re-invest their earnings into their business. You're essentially saying that facebook will invest that $1 into growing their earnings faster than you could generate a similar return by investing in something else. When a company reaches a point where the market is mature and further investment will likely not result in a earnings growth rate that beats similar alternative investments, it pays a dividend and the stock actually becomes a cash stream, which you can then re-invest or spend freely.
marvin 14y ago
Yes. A P/E rate this high implies that the market believes Facebook will considerably increase its earnings in the future. The lower P/E ratio of Google and Apple implies that the market does not believe in significant earnings growth in the future. You rarely buy a stock looking only at the company's present situation. For instance, Ford for a long time had a price/assets value smaller than 1, which meant that one dollar of Ford stock gave you more than 1 dollar's worth of Ford's assets. But during this time, Ford was also losing a lot of money.

rm999 14y ago

You're looking at the trailing P/E, which looks at the past four quarters of earnings, but for fast growing companies investors tend to use the forward P/E, which is based on estimates of the next four quarters. FB's forward P/E is 29, google's is 14. Neither estimate is perfect, but the forward P/E tends to take expected growth into account much more effectively.

gfodor 14y ago
Forward P/E is particularly bad in this case though since it's hard to have much confidence in forward earnings estimates for FB since analysts know nearly nothing about it yet.

calvinlough 14y ago

Google Finance says the P/E is 100. I don't know enough about this stuff to say whether 62 or 100 is right. Does anyone know which value is right? Where did you find the value 62?

tedunangst 14y ago
Trailing (previous results) vs forward (projected results).

majani 14y ago

I think that's been a big problem with this stock: people using wrong comparables. Facebook's product is much more similar to Yahoo/AOL than Google.