4 ms·

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

by 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
  What was Google's P/S like 5 years ago?
  - fauigerzigerk 13y ago
    My very very rough guesstimate is that in 2008 Google's P/S was about 7. Revenue: 22bn Number of shares: 317mm Average share price (P): $500 Revenues per share (RPS): $69.4 P/RPS = 7.2
- cookiecaper 13y ago
  Of course, the simple solution is to charge users a small annual fee for advanced features if not even for basic account maintenance. Your FB profile would become read-only if you don't pay an annual fee. It's always so intriguing to me that people cling so hard to the ad-supported models even though it's shown that they simply don't work except in anomalous cases, not even for Facebook, which surely receives humongous portions of all net users' attention. It's not a good starting strategy for anyone, and it appears that it's not a good long-term strategy even for the lottery winners that have actually "made money" from it heretofore.

by gohrt 13y ago

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
What was Google's P/S like 5 years ago?
- fauigerzigerk 13y ago
  My very very rough guesstimate is that in 2008 Google's P/S was about 7. Revenue: 22bn Number of shares: 317mm Average share price (P): $500 Revenues per share (RPS): $69.4 P/RPS = 7.2
cookiecaper 13y ago
Of course, the simple solution is to charge users a small annual fee for advanced features if not even for basic account maintenance. Your FB profile would become read-only if you don't pay an annual fee. It's always so intriguing to me that people cling so hard to the ad-supported models even though it's shown that they simply don't work except in anomalous cases, not even for Facebook, which surely receives humongous portions of all net users' attention. It's not a good starting strategy for anyone, and it appears that it's not a good long-term strategy even for the lottery winners that have actually "made money" from it heretofore.