Most people would agree that Apple is a high growth company. What would you pay for Apple shares? At the current time you would pay around 14 times their current year earnings. This is their price-earnings ratio.
What about Facebook? It is a high growth company as well. How much would you pay for Facebook? A bit more than Apple or about the same? How about 100 times current earnings? That’s the price Facebook are trading at on the stock market. Is this justified?
Why is Apple priced at 14 times and Facebook 100 times?
Does Facebook have better growth prospects?
Does Facebook have an indestructable brand that no one can replicate?
How easy would it be to create a rival to Facebook?
Before Facebook came along there was MySpace, which was pretty dominant in its time, but where is it now? It was bought by News Corp in 2006 and was sold off last year for $35m. It was market leader, but Facebook came along and took away its market. Could the same thing happen to Facebook?
For Facebook to justify its valuation it needs to become as embedded and as irreplaceable as Google is to many people. Google is part of the furniture, it humms away in the background, providing its users with necessary information in the blink of an eye. Facebook needs to become like that. They have 900m users at the current time, the next 900m are unlikely to be as profitable as the first 900m. Facebook needs to do more than it does just now.
Would you buy Facebook at today’s price of $33 and being valued at 100 times its earnings (see here for some help in making that buying decision)?