Facebooks is priced at 240X Price to Earnings. If they start losing users or even stop growing its hard to imagine how that PE ratio continues to makes any sense.
Does a 240x P/E ever make sense? Maybe if you just patented a fix for global warming or a cure for a common cancer or something of that sort of magnitude, but for a non-essential technology company?
I know only a few very successful investors, both professional and private, and I've often asked them how they do it. Almost invariably, the answer is that they do their homework, use common sense, and play the long game rather than trying to beat the short-term markets. A recurring theme on the common sense score is that they have a personal threshold for P/E above which they will just walk away. None of these people I know would invest at 24x, other than under exceptional circumstances. At 240x, they'd be seriously considering shorting the stock.
In Facebook's case, the maths is disturbing: to justify a 240 P/E objectively, they need to double revenues year-on-year for about 7 years just to break even. Unfortunately, in less than 3 of those years, they've run out of people in the world they can sign up to advertise to, so even if they could sign up everyone in the entire world they would still need to figure out how to make about 20x as much money per user depending on how you count inflation.
Of course there is an argument that Facebook's P/E is artificially low because growth and mobile and stuff, but if you're spending 95% of your revenues just to keep things going and attract new users, and the idealised global market for your service is less than 7x your current user base, that still looks like you're doing it wrong from here.
I am genuinely curious here: Can anyone suggest a sound reason why they would buy into Facebook at the current price, other than as a speculative short-term investment? Put another way, is anything keeping FB's stock price up other than a bubble effect?
>At 240x, they'd be seriously considering shorting the stock.
I have associates involved in the management of a hedge fund, and they inform me that shorts are so highly demanded for the web IPOs of 2011 and 2012 that they've actually had trouble getting them.
Most professional investors aren't buying the hype this time around, I think. Even Facebook's IPO last year vastly underperformed. The consequences of the inevitable fold of Facebook will be very interesting.
I have associates involved in the management of a hedge fund, and they inform me that shorts are so highly demanded for the web IPOs of 2011 and 2012 that they've actually had trouble getting them.
Interesting anecdote. I'm not surprised that this is the case, but I'm surprised that it's the first time I've seen anyone mention it in a discussion.
Does a 240x P/E ever make sense? Maybe if you just patented a fix for global warming or a cure for a common cancer or something of that sort of magnitude, but for a non-essential technology company?
I know only a few very successful investors, both professional and private, and I've often asked them how they do it. Almost invariably, the answer is that they do their homework, use common sense, and play the long game rather than trying to beat the short-term markets. A recurring theme on the common sense score is that they have a personal threshold for P/E above which they will just walk away. None of these people I know would invest at 24x, other than under exceptional circumstances. At 240x, they'd be seriously considering shorting the stock.
In Facebook's case, the maths is disturbing: to justify a 240 P/E objectively, they need to double revenues year-on-year for about 7 years just to break even. Unfortunately, in less than 3 of those years, they've run out of people in the world they can sign up to advertise to, so even if they could sign up everyone in the entire world they would still need to figure out how to make about 20x as much money per user depending on how you count inflation.
Of course there is an argument that Facebook's P/E is artificially low because growth and mobile and stuff, but if you're spending 95% of your revenues just to keep things going and attract new users, and the idealised global market for your service is less than 7x your current user base, that still looks like you're doing it wrong from here.
I am genuinely curious here: Can anyone suggest a sound reason why they would buy into Facebook at the current price, other than as a speculative short-term investment? Put another way, is anything keeping FB's stock price up other than a bubble effect?