A Friend Request From Facebook Inc (FB)

The search business is especially attractive when it comes to online advertising, as many ads provide a valuable service to the user. Think of a Chinese restaurant ad as an example when someone searches for “Chinese food” in a certain geographic area, both the user and the advertiser gain from the ad, and this means that companies like Google Inc (NASDAQ:GOOG) and Yahoo! Inc. (NASDAQ:YHOO) are in a position of strength to compete against Facebook Inc (NASDAQ:FB) in the long term. Facebook ads, on the other hand, are mostly an inconvenience for its users

Its also worth noting that Facebook Inc (NASDAQ:FB) is trading at a sky high P/E ratio of almost 44 times earnings estimates for the next year, while both Google Inc (NASDAQ:GOOG) and Yahoo! Inc. (NASDAQ:YHOO) trade at forward P/E ratios below 17. I`m not saying that Facebook can´t grow fast enough to justify such a premium, but high expectations sometimes lead to big disappointments, and that´s an important risk to consider.

Bottom line

Facebook Inc (NASDAQ:FB) has made some remarkable improvements over the last quarter, and the company´s news feeds could be a powerful move to adapt and thrive in the mobile paradigm. However, one quarter does not make a sustainable trend, especially when it comes to analyzing a new advertising product. Facebook´s friend proposal is getting more interesting, but I don`t know the company well enough to accept it yet.

Andrés Cardenal owns shares of Google. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of Facebook and Google.

The article A Friend Request From Facebook originally appeared on Fool.com.

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