After having an IPO price of $42.00 per share, the share price of Facebook Inc (NASDAQ:FB) continued to fall for months until it bottomed at $17.55. Once the share price found the bottom, it rallied all the way up to $32.46 even though it started to fall again. Two and half months after reaching peak, Facebook Inc (NASDAQ:FB) shares currently trade for around $26 which means that the share price is down by 20% since then. Did Facebook find a bottom?
Is Facebook Expensive?
Whenever Facebook Inc (NASDAQ:FB) is mentioned in the investment world, a lot of people point out that the shares of the company are too expensive given the company’s current earnings. In contrast, those who are bullish on Facebook mention how they are more concerned with Facebook’s future earnings rather than past earnings. After all, share price of companies is mostly determined by expected earnings rather than achieved earnings. Many times, a company will beat estimates by a large margin, but see its share price plunge because of a bad future guidance; whereas many times a company will fail to beat estimates but still see a rally in its share price because of a good future guidance. The stock market is future oriented.
Analysts Are Optimistic
Having said that, Facebook Inc (NASDAQ:FB) will continue to be expensive for years to come, because even if the company doubles its earnings every year for the next 5 years while the share price remains flat during the same period, it will still trade for a higher than average P/E ratio. On the other hand, many analysts are highly optimistic of the company. Currently, out of the 29 analysts covering the stock, 15 rate it as “strong buy,” 3 rate it as “buy,” and 11 rate it as “hold.” Interestingly enough, there are no analysts who rate the company as either “underperform” or “sell.” The average rating on the company is “strong buy.” Furthermore, the average target price on Facebook is $34, which indicates an upside of 35% on the current price of the company. The analysts expect Facebook to earn 38 cents per share in 2013, 48 cents per share in 2014, 60 cents per share in 2015 and $1.42 per share in 2016. Even if we look at Facebook’s 2006 estimates, we are still looking at a forward P/E ratio of 18. Then why are analysts so optimistic of this company?
Facebook’s Most Valuable Asset
There are encouraging points for the company and its investors. Keep in mind that Facebook Inc (NASDAQ:FB) owns a lot of valuable data. So far, the company has acquired useful personal information of every 5th person in the world above the age of 12. This is the kind of personal information that marketing companies are drooling over. In the world, only Google Inc (NASDAQ:GOOG) has the kind of database of humans that can rival the database of Facebook. While many marketing companies that operate on the internet have to guess someone’s gender, age, ethnicity and interests based on their internet habits, keyword usage and surfing history, the users give all this information to Facebook voluntarily. If the company uses the information intelligently, the sky is the limit in terms of opportunities.
Mark Zuckerberg Is Learning His Lesson
Once the product started to improve, Mr. Zuckerberg started to put more emphasis on monetizing the product. One of the biggest challenges in front of Facebook Inc (NASDAQ:FB) was the immigration of users from PCs to mobile devices, because the company was not aware of a way of monetizing users on mobile devices. The small screen of mobile devices made it difficult to fit content and money-generating ads at the same time. The company found a brilliant way to battle this issue as it inserted hidden ads in people’s newsfeed. Many people didn’t even realize that they were receiving ads on their mobile device. At the end of the day, the company accomplished the difficult task of finding a solution that would make both users and advertisement companies happy.
