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Facebooks is priced at 240X Price to Earnings. If they start losing users or even stop growing its hard to imagine how that PE ratio continues to makes any sen

Facebooks is priced at 240X Price to Earnings. If they start losing users or even stop growing its hard to imagine how that PE ratio continues to makes any sense. Even with an increase in mobile revenue its still less then desktop revenue and users are certainly flocking to mobile too which is a double wammy. So facebook has to transition to making more money per user if its user base stops growing. Otherwise you're going to have people really questioning the price of the stock which could end up effecting the whole industry.

InclinedPlane 13y ago
The only way that valuation made sense is if facebook managed to capture an enormous fraction of all worldwide ad revenue. That always seemed extremely unlikely to me.
- MichaelApproved 13y ago
  OP is only giving half the story. FB earnings are, in a sense, artificially low. They are dumping money into expanding and growing. FB wants good earnings but, right now, that's not as important as growing users and use. Of course there will always be money spent on growth but to what extent. When they go from dumping money into growth, P/E will be more meaningful in the typical sense.
  - wavesounds 13y ago
    Investing in growth is only an excuse for high PE if you are growing though, if the trend in the article continues and they maintain this PE ratio then maybe they're throwing good money after bad
  - InclinedPlane 13y ago
    I was talking about revenue. Yes, they are growing. They are expanding their revenue. They have to in order to justify their valuation. But they need to grow at unsustainable rates for a fairly long time for that valuation to make sense. Unless they completely pivot the company they would, as I mentioned, need to grab significant fraction of all of Earth's advertising revenue, in all media. It's unreasonable to assume that current share holders are investing in facebook out of some belief in an unannounced, unplanned, speculative pivot into a different industry, that's either clairvoyance or rank stupidity.
gohrt 13y ago
I don't know Facebook's details, but in theory another possibility to lower P/E: "Stop pouring money into expansion, to lower expenses and increase bottom-line earnings." For example, Amazon could certainly do that, since they spend heavily on expansion
- logn 13y ago
  But the flip side is, as soon as they stop investing in expansion, the market will immediately start to wonder if their P/E is justified and might cause a decline in price. The signal from the market to Facebook now is that the shareholders want to invest in growth. And given FB's dominance, size, and talent, it's hard to argue otherwise. Facebook could still change a lot, and I think we're only seeing the beginning of social sharing/search/commerce/media into our lives.
  - XorNot 13y ago
    That's a pretty generic signal - shareholders always want to invest in growth. The problem Facebook has is that ridiculous P/E makes them a bad buy if you would be happy with dividends, which means growth is their only option.
- fauigerzigerk 13y ago
  That is an important aspect, but let's consider the P/S (price/sales) ratio to gauge that savings potential: Facebook: 22.3 Google: 5.9 Amazon: 2.3 (source: money.msn.com) Of course, comparing to Amazon doesn't make sense. Retailers are always going to have very low margins and low P/S ratios. But comparing to Google does make sense. Assuming Facebook's potential margins are similar to Google's, Facebook would have to have incredible sales growth or incredible cost cutting in order to lower their P/E significantly. I think it may be possible for Facebook to achieve that goal. People will put up with incredible levels of spam and harrassment in exchange for not losing "friends". So they might be able sell four times as many ads as they do now and cut costs dramatically on top of it.
  - lmm 13y ago
tantalor 13y ago
[citation needed]
- jamesaguilar 13y ago
  Normally you use this when there is a fact in dispute (on Reddit, not here). There are no facts in question in the comment you're responding to. There are arguments you may disagree with, but you don't need a citation to make an argument.
  - tantalor 13y ago
    Facebooks is priced at 240X Price to Earnings Where is this number from? I see different numbers reported elsewhere.
    - jamesaguilar 13y ago
      Look for P/E ratio. https://www.google.com/finance?q=fb&ei=TaBkUum8GOGuiQKpyQE https://www.google.com/finance?q=fb&ei=TaBkUum8GOGuiQKpyQE He was off by a little but it's not material to his point.
Silhouette 13y ago
Facebooks is priced at 240X Price to Earnings. If they start losing users or even stop growing its hard to imagine how that PE ratio continues to makes any sense. Does a 240x P/E ever make sense? Maybe if you just patented a fix for global warming or a cure for a common cancer or something of that sort of magnitude, but for a non-essential technology company? I know only a few very successful investors, both professional and private, and I've often asked them how they do it. Almost invariably, the answer is that they do their homework, use common sense, and play the long game rather than trying to beat the short-term markets. A recurring theme on the common sense score is that they have a personal threshold for P/E above which they will just walk away. None of these people I know would invest at 24x, other than under exceptional circumstances. At 240x, they'd be seriously considering shorting the stock. In Facebook's case, the maths is disturbing: to justify a 240 P/E objectively, they need to double revenues year-on-year for about 7 years just to break even. Unfortunately, in less than 3 of those years, they've run out of people in the world they can sign up to advertise to, so even if they could sign up everyone in the entire world they would still need to figure out how to make about 20x as much money per user depending on how you count inflation. Of course there is an argument that Facebook's P/E is artificially low because growth and mobile and stuff, but if you're spending 95% of your revenues just to keep things going and attract new users, and the idealised global market for your service is less than 7x your current user base, that still looks like you're doing it wrong from here. I am genuinely curious here: Can anyone suggest a sound reason why they would buy into Facebook at the current price, other than as a speculative short-term investment? Put another way, is anything keeping FB's stock price up other than a bubble effect?
- cookiecaper 13y ago
  >At 240x, they'd be seriously considering shorting the stock. I have associates involved in the management of a hedge fund, and they inform me that shorts are so highly demanded for the web IPOs of 2011 and 2012 that they've actually had trouble getting them. Most professional investors aren't buying the hype this time around, I think. Even Facebook's IPO last year vastly underperformed. The consequences of the inevitable fold of Facebook will be very interesting.
  - 13y ago
ajiang 13y ago
So it is misleading to make conclusions from a PE ratio at any given time, simply because earnings for any particular quarter or even year is very situational. If for perfectly legitimate reasons (say to fuel growth) my earnings this quarter are $1, then my P/E ratio might be astronomical. In the context of pro-forma financials, taking out one time costs and special events, my P/E ratio is more telling. Amazon is a great example of this. There are quarters where AMZN has negative earnings. Does that mean that Amazon is overvalued? Not necessarily. Dig a bit deeper, take out things like acquisitions and restructuring costs for example, take earnings over time and that will give you a much stronger case to make a decision on valuation.

InclinedPlane 13y ago

The only way that valuation made sense is if facebook managed to capture an enormous fraction of all worldwide ad revenue. That always seemed extremely unlikely to me.

MichaelApproved 13y ago
OP is only giving half the story. FB earnings are, in a sense, artificially low. They are dumping money into expanding and growing. FB wants good earnings but, right now, that's not as important as growing users and use. Of course there will always be money spent on growth but to what extent. When they go from dumping money into growth, P/E will be more meaningful in the typical sense.
- wavesounds 13y ago
  Investing in growth is only an excuse for high PE if you are growing though, if the trend in the article continues and they maintain this PE ratio then maybe they're throwing good money after bad
- InclinedPlane 13y ago
  I was talking about revenue. Yes, they are growing. They are expanding their revenue. They have to in order to justify their valuation. But they need to grow at unsustainable rates for a fairly long time for that valuation to make sense. Unless they completely pivot the company they would, as I mentioned, need to grab significant fraction of all of Earth's advertising revenue, in all media. It's unreasonable to assume that current share holders are investing in facebook out of some belief in an unannounced, unplanned, speculative pivot into a different industry, that's either clairvoyance or rank stupidity.

gohrt 13y ago

I don't know Facebook's details, but in theory another possibility to lower P/E: "Stop pouring money into expansion, to lower expenses and increase bottom-line earnings." For example, Amazon could certainly do that, since they spend heavily on expansion

logn 13y ago
But the flip side is, as soon as they stop investing in expansion, the market will immediately start to wonder if their P/E is justified and might cause a decline in price. The signal from the market to Facebook now is that the shareholders want to invest in growth. And given FB's dominance, size, and talent, it's hard to argue otherwise. Facebook could still change a lot, and I think we're only seeing the beginning of social sharing/search/commerce/media into our lives.
- XorNot 13y ago
  That's a pretty generic signal - shareholders always want to invest in growth. The problem Facebook has is that ridiculous P/E makes them a bad buy if you would be happy with dividends, which means growth is their only option.
fauigerzigerk 13y ago
That is an important aspect, but let's consider the P/S (price/sales) ratio to gauge that savings potential: Facebook: 22.3 Google: 5.9 Amazon: 2.3 (source: money.msn.com) Of course, comparing to Amazon doesn't make sense. Retailers are always going to have very low margins and low P/S ratios. But comparing to Google does make sense. Assuming Facebook's potential margins are similar to Google's, Facebook would have to have incredible sales growth or incredible cost cutting in order to lower their P/E significantly. I think it may be possible for Facebook to achieve that goal. People will put up with incredible levels of spam and harrassment in exchange for not losing "friends". So they might be able sell four times as many ads as they do now and cut costs dramatically on top of it.
- lmm 13y ago

tantalor 13y ago

[citation needed]

jamesaguilar 13y ago
Normally you use this when there is a fact in dispute (on Reddit, not here). There are no facts in question in the comment you're responding to. There are arguments you may disagree with, but you don't need a citation to make an argument.
- tantalor 13y ago
  Facebooks is priced at 240X Price to Earnings Where is this number from? I see different numbers reported elsewhere.
  - jamesaguilar 13y ago
    Look for P/E ratio. https://www.google.com/finance?q=fb&ei=TaBkUum8GOGuiQKpyQE https://www.google.com/finance?q=fb&ei=TaBkUum8GOGuiQKpyQE He was off by a little but it's not material to his point.

Silhouette 13y ago

Facebooks is priced at 240X Price to Earnings. If they start losing users or even stop growing its hard to imagine how that PE ratio continues to makes any sense. Does a 240x P/E ever make sense? Maybe if you just patented a fix for global warming or a cure for a common cancer or something of that sort of magnitude, but for a non-essential technology company? I know only a few very successful investors, both professional and private, and I've often asked them how they do it. Almost invariably, the answer is that they do their homework, use common sense, and play the long game rather than trying to beat the short-term markets. A recurring theme on the common sense score is that they have a personal threshold for P/E above which they will just walk away. None of these people I know would invest at 24x, other than under exceptional circumstances. At 240x, they'd be seriously considering shorting the stock. In Facebook's case, the maths is disturbing: to justify a 240 P/E objectively, they need to double revenues year-on-year for about 7 years just to break even. Unfortunately, in less than 3 of those years, they've run out of people in the world they can sign up to advertise to, so even if they could sign up everyone in the entire world they would still need to figure out how to make about 20x as much money per user depending on how you count inflation. Of course there is an argument that Facebook's P/E is artificially low because growth and mobile and stuff, but if you're spending 95% of your revenues just to keep things going and attract new users, and the idealised global market for your service is less than 7x your current user base, that still looks like you're doing it wrong from here. I am genuinely curious here: Can anyone suggest a sound reason why they would buy into Facebook at the current price, other than as a speculative short-term investment? Put another way, is anything keeping FB's stock price up other than a bubble effect?

cookiecaper 13y ago
>At 240x, they'd be seriously considering shorting the stock. I have associates involved in the management of a hedge fund, and they inform me that shorts are so highly demanded for the web IPOs of 2011 and 2012 that they've actually had trouble getting them. Most professional investors aren't buying the hype this time around, I think. Even Facebook's IPO last year vastly underperformed. The consequences of the inevitable fold of Facebook will be very interesting.
- 13y ago

ajiang 13y ago

So it is misleading to make conclusions from a PE ratio at any given time, simply because earnings for any particular quarter or even year is very situational. If for perfectly legitimate reasons (say to fuel growth) my earnings this quarter are $1, then my P/E ratio might be astronomical. In the context of pro-forma financials, taking out one time costs and special events, my P/E ratio is more telling. Amazon is a great example of this. There are quarters where AMZN has negative earnings. Does that mean that Amazon is overvalued? Not necessarily. Dig a bit deeper, take out things like acquisitions and restructuring costs for example, take earnings over time and that will give you a much stronger case to make a decision on valuation.