Yet, at its current price, Facebook Inc (NASDAQ:FB) is trading at an excessive valuation. Have investors gotten ahead of themselves, or is there room for further upside from here?
Facebook’s current valuation
Shares of Facebook are trading near $38, giving the social networking giant a price-to-earnings ratio of over 160, and a forward PE of nearly 38. For comparison, the broader S&P 500 index is trading with a PE ratio of just 19, and a forward PE of about 15.
Google Inc (NASDAQ:GOOG) may be the closest thing the company has to a true competitor. The search giant is trading with a PE ratio of about 25, less than one-sixth of Facebook Inc (NASDAQ:FB)’s, and a forward PE of only 17.
Stats don’t tell the whole story
But of course, these numbers don’t tell the whole story. Many stocks have traded at excessive valuations for years, and have continued to reward shareholders with higher prices.
Amazon.com, Inc. (NASDAQ:AMZN) is perhaps the quintessential stock when it comes to consistently “overvalued” companies. It technically has no PE ratio, as it reported a loss last week, but the metric has been as high as 3,500 in recent months. Based on analyst estimates, its forward PE is 108.
This isn’t a recent phenomenon — Amazon was voted the most overvalued stock of 1999. Although shares did tumble when the tech bubble burst, investors who bought in back then would still be sitting on a gain of over 340%, more than 10 times the return of the S&P 500.
Over the years, Amazon.com, Inc. (NASDAQ:AMZN) has been able to justify its excessive valuation because it just keeps growing. Rather than focus on returning capital to shareholders like a typical cash-generative, mature business, Amazon invests its money into new projects.
Recent initiatives include Amazon.com, Inc. (NASDAQ:AMZN) Web Services, which currently dominates the public cloud industry and could be worth $24 billion, and the Kindle Fire tablet, one of the most popular Android-based tablets in the world.
Can Facebook keep growing?
So can Facebook Inc (NASDAQ:FB) pull an Amazon and continue to grow? There’s reason to believe that it can. Even though there are now over a billion people on Facebook (a sixth of the planet), the company continues to add users every quarter, and is finding ways to monetize its large base with new initiatives like gift-giving.
And more of these are certainly possible. Consider Tinder, which is basically just a Facebook Inc (NASDAQ:FB) add-on. In less than a year, the mobile dating app has attracted millions of users, and seems poised to dominate the online dating world.
But more concrete is the company’s ability to monetize mobile. In an interview with Bloomberg, L2’s Scott Galloway observed that the company has been able to charge as much for its mobile ad products as it has for its desktop products — something that no other company has been able to do.
