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Comment by krigath | Hacker News Reader

Apple's P/E ratio is 13.12 [1]. Facebook's P/E ratio is 107.66 [2].

The P/E ratio[3] is: market price per share / annual earnings per share

This basically means that Apple makes as much profit as their are valued at in 13.12 years, whereas it would take Facebook 107.66 years to afford to buy themselves.

That doesn't make any sense, and if we assume that their P/E ratio should be roughly the same, their stock price should be around [4] 33.54/(107.66/13.12) = 4.09 USD

Edit: Google's P/E ratio is 18.32, and if Facebook were to have the same P/E ratio its stock price would have to be 5.71 USD [5].

[1] http://www.google.com/finance?q=AAPL

[2] http://www.google.com/finance?q=NASDAQ:FB

[3] http://en.wikipedia.org/wiki/PE_ratio

[4] https://www.google.co.uk/search?q=33.54%2F(107.66%2F13.12)

[5] https://www.google.co.uk/search?q=33.54%2F(107.66%2F18.32)

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To be fair, Google also traded at a P/E well over 100 in the early post-IPO days. http://ycharts.com/companies/GOOG/historical_data/pe_ratio?s...

AMZN: P/E 178.42 as of now

Hugely overvalued, of course. Having wiped out competition, there is no room left for them to grow.

I'm sure the same thing was said before they started the web services business, too, but they sure managed to find some room for growth there.

Amazon also has a multi faceted business model. Distribution, SaaS and PaaS offerings, Hardware sales, and probably some more I'm overlooking.

Facebook sells ad space to people on their chat platform that have little to zero intent to buy. The last time I saw a company (AOL) try to stuff ads in a chat client... well we all know how that went.

But Facebook has already managed to do something that Google hasn't: have more than one source of revenue

Facebook have a shitty ad product and it still generates $4b p.a and climbing, imagine how good they would be if they actually figured this stuff out

>and it still generates $4b p.a and climbing, imagine how good they would be if they actually figured this stuff out

Please also consider a counter case, what if $4b revenue i.e. roughly $4 per user per year, is the best you can have for such a product. And the potential for growth of no. of users is not high, then what?

This seems very strange to me. There are social networks monetizing at much higher ARPU. Why is Facebook different?

I don't understand that at all. I assume your point is that Google only makes money from "ads", and that makes it a single source of revenue despite being well-diversified advertising products across a big segment of the tech industry (Youtube ads aren't the same as search ads, which are different from Android ads, etc...)

But... how is facebook any different? They have ads. And... more ads, as far as I can see. What's the "more than one" source of revenue you're referring to?

Facebook has ads and Facebook Credits. S-1 shows about 18% of Facebook revenue comes from Facebook Credits, so Facebook is better than Google in "diverse source of revenue" metric.

That's fair; I didn't realize the fraction was so high. So, I guess the question then would be do freemium sales by affiliated apps constitute a meaningfully "diversivied" revenue stream? I'd argue that they don't, honestly. Downturns in the market that reduce eyeballs will hit them both. Both scale more or less directly with disposable income in the facebook user demographic.

Normally you talk about diversification in the sense of risk management: i.e. "It's OK if the social media market tanks because we still sell phone service." (or whatever: hardware, concert tickets, coal mine permitting services, etc...).

From that perspective, both Facebook and Google are very exposed. Though if anything I'd still say that Google is better situated due their presence in pretty much all of online advertising. As long as there is anything worth advertising to someone on the internet, Google has an answer for that.

Google sells Hardware, Software, SaaS, PaaS and Ads.

HW: Google Search Appliance, Google Nexus SW: Google Earth Pro, Google Sketchup Pro SaaS: Google Docs for Business, Google API's (Maps, Google+) Paas: Google App Engine Ads: Google Ads

I know that 96% of GOOG's 2011 Revenue came from Ads, but GOOG is at least trying other markets. I personally wouldn't be surprised if FB released a phone.

Google has sold its last copy of. Sketchup http://sketchupdate.blogspot.com/2012/04/new-home-for-sketch...

... it would take Facebook 107.66 years to afford to buy themselves.

Only if their earnings were constant for the next 107.66 years. People expect Facebook's earnings to continue to grow. Apple's earnings, by contrast, are considered mature.

Facebook's earnings are via a controlled ecosystem. You can't maintain higher profits that way. You can have short-term higher profits that way - just not maintain them.

Yep that's the whole point. Apple's value is based on a solid record, while Facebook's is extremely speculative.

They may continue to grow or they may tank. People are betting for the former, but so far with very little real knowledge of what they're doing.

Tech is usually fickle and high-risk, but Facebook is in a league of its own.

Should facebook be considered an upstart when it's been around for 8 years?

It's not about whether they can be considered an "upstart" it's about whether speculators think they have the potential to make much more money than they already do. Amazon for example has been around for 2 decades and have a PE ratio of 179 because they've put nearly all their profits into investing in new businesses that has a lot of potential to make more money down the road.

Meanwhile, Facebook is investing in things like Instagram, lol.

... spending all their 2011 profits: http://adage.com/article/digital/facebook-files-ipo-reveals-...

Do you think taking the Facebook PE and comparing it to Apple is some major revelation that investors, or most people who read a newspaper, do not know? Every FB thread on HN has somebody pointing out PE, and then a thousand responses on what is wrong with that argument. So lets do it again.

The PE works out to be so high because there is a growth expectation from Facebook's one billion users. All that it says is that the market believes the chances that Facebook will be able to grow revenue, and in the future, profit, is very high.

PE is not an accurate indicator of the value of this stock. PE is used to compare mature yield stock, the type that all those Warren Buffet books talk about. With Facebook still being a young company the numbers to track are revenue growth and price/revenue.

Just to pick a nit. To date Facebook's P/E is high because Facebook said so. Facebook's value has never been set by an open market until about 3 or 4 hours ago.

Its P/E isn't mean to be an indicator of value, its shows the markets expectations of growth. And I think a lot of people are interested to see if the "market"'s expectations are inline with their own - and to that end P/E is great.

No, Facebook's P/E has been high because people having been willing to buy the stock at a high price. Facebook can't dictate what price other people are willing to pay. It's always been set by the market, from day 1.

I disagree - though I concede its a semantic argument (and I wasn't referring to its private sales - which is valid), but the $38 price was dictated by FB and propped up (artificially) by MS it was not market set. I think that's reinforced by the drop we've seen today when the underwriters aren't there to prop the price up.

And what's the P/E at the $33 price? OK then.

>Just to pick a nit. To date Facebook's P/E is high because Facebook said so. Facebook's value has never been set by an open market until about 3 or 4 hours ago.

Not an open market, no, but a market nonetheless. Anytime a company takes a funding round, whether from a single incubator or a dozen VCs, the transaction implicitly prices the company pursuant to growth expectations. (And that's not even mentioning Facebook's heavy trading in SecondMarket.) Just because a market is restricted and low-volume doesn't mean it doesn't exist; any time a transaction occurs, you'll find a market behind it.

You've failed to factor in growth rate. Your calculations for how long it will take to earn back the share value are assuming no growth in EPS over that timeframe.

I wouldn't be surprised if Apple's EPS growth outpaces Facebook, but these numbers are completely meaningless until you at least make a stab at adding in projected growth.

WillyF,

I'd be more than happy to know "your" expected growth rate. Facebook has not disclosed its business plan, views on the online ad market, ongoing capital expenditures and working capital needs.

Who's failed to provide future growth information is Facebook, not the other way.

More importantly, the Tech audience keeps looking at P/E as a valuation metric, but what rigorous and top asset managers do is look at Free Cash Flow to Equity, not Net Income. On a FCF to Equity valuation, FB IPOed at +220x.

Even at a generous P/E or FCF/E ratio of 25x, Facebook's Free Cash Flow needs to go from $450m to $4,000m in the next 24-36 months. Do you think that is possible? After looking at their infrastructure needs I think not.

I think it's you who has failed in the calculations.

How can I fail in the calculations when I didn't offer any calculations? All I said is that if you're using P/E ratio as a metric without a growth rate, you're doing it wrong.

WillyF, the last comment was a big aggressive to you to bring home the point, but I believe the main point was that even with generous predictions on their future business plan (which as far we all know doesn't exist) that facebook is overvaluated by, well, a lot.

Case and point. thx

It makes sense if you believe that the profit will go up dramatically in the not too far future. And it looks like many people think so.

There's no reason to assume their P/E should be the same. P/E is only one of a range of ways to compare company values, and there are lots of reasons (growth, risk, etc) why the P/Es of two different companies might differ. I don't agree with FB's valuation, but the argument has to be more complex than simply comparing P/Es.

P/E ratio can also go down if annual earning per share increases. I think it is too early to comment on that. They have HUGE user base and I hope they have a good chance to increase their profit. Lets wait and see :)

This whole argument is asinine. You need to consider that each company is floating a different number of total shares. Buying one share in FB and one share in Google would not grant you an equivalent stake in each company. You need to see how many outstanding shares each company has on the market (and what fraction of the company is public).

For your purposes (comparing valuations between two companies), it would make more sense to compare market caps.

P/E ratio does already correct for number of shares: it's a ratio of your share's price to your share of the company's earnings, based on the percentage of the company your share represents. Alternately, if you take totals, it's market cap divided by earnings.

Total Valuation / Total Earnings. Increasing the shares will not change the math...

Think about it in your head with an imaginary company with 1, 2 or 4 shares.

I've always been baffled by stock splits (and those calling for them) for this very reason. I suppose it makes sense for BRK.A's $120k shares, but for AAPL?

Stock splits are an interesting discussion. Other than psychological differences, a split really only increase liquidity and encourage more small investors but it also encourages more short term speculation. Berkshire is happy to continue to cater to the highest class of long term investors with the added benefit of being noted as the highest priced stock in the NYSE. Although, they did recently do a large split of their class B stock to allow more trading and to be included in the S&P 500.

Google is doing a stock split to create new nonvoting shares.

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