In this post data from Google Finance will be used. The financial information is accurate as of the time of writing. By the time you read this, the data will be slightly old.
Unfair financial comparisons are oodles of fun to make. In that vein, today we are going to value technology giants using Facebook’s PE ratio. Essentially, we’re going to take a technology giant, calculate the ratio of its PE ratio to Facebook’s, multiply is market valuation by that figure, and then .laugh at how much some tech companies would be worth if they were valued as richly as Zuckerberg’s enterprise.
Before we begin, no, we are not picking on Facebook. This post is illustrative, not deprecatory. If we had wanted to make this exercise a real jest, we would have employed LinkedIn instead of Facebook, whose PE ratio is 6.7 times as high as the social giant’s.
According to Google Finance, Facebook’s current PE ratio is 99.67, valuing the firm at 66.58 billion. In each of the following entries, a company’s current PE, its ratio to Facebook’s PE, its current valuation, and its adjusted valuation are listed. Enjoy.
- Current PE: 14.96. Ratio required: 6.66:1. Current market valuation: $573.70 billion. Adjusted valuation: $3.82 trillion
- Current PE: 11.18. Ratio required: 8.92:1. Current market valuation: $258.24 billion. Adjusted valuation: $2.3 trillion
- Current PE: 14.66. Ratio required: 6.8:1. Current market valuation: $226.81 billion. Adjusted valuation: $1.54 trillion
- Current PE: 18.12. Ratio required: 5.5:1. Current market valuation: $194.88 billion. Adjusted valuation: $1.07 trillion
- Current PE: 7.88. Ratio required: 12.65:1. Current market value: $40.13 billion. Adjusted valuation: $505.6 billion
Facebook’s relatively high PE ratio is a firm indicator that the market expects higher rates of earnings growth from the company than the firms listed above. That likely makes sense, given its smaller size, allowing the company to grow more quickly on a percentage basis than other, larger firms might be able to.
However, it’s important to keep in mind how wildly valuations by the public market vary. To make that point, Apple is valued by about 25% more than Microsoft, on a per-dollar of profit basis.
Is Facebook worth its valuation? The market thinks so. The company has found firm footing at the ~100 PE ratio mark, showing consistent performance in that range. Yes, that’s below its IPO price, but it now appears that its initial price was simply too high for it to command. That’s bad for those who tried to get into the company on the first day that they could, but the firm has stabilized.
Looking at Microsoft’s last two complete fiscal years, the company grew its net income by 19%. Its earnings per share grew even more. And the company trades with a sub-12 PE ratio. Apple is treated in a similar fashion. It will be interesting to see if those companies see their ratios rise if Facebook’s falls.
For now, enjoy the numbers.
Top Image Credit: Chris Brown