Facebook falls following Fed social media fears

Less than a week before Facebook is due to post its latest figures, the Federal Reserve has stepped away from its normal format and talked specifically about the social media sector.

Facebook logo on a wall
Source: Bloomberg

How worried should investors be over the price earning’s multiples that Facebook has? At the close of business yesterday the PE ratio for Facebook was 89.55, almost two and a half times the 35.32 PE ratio of the NASDAQ index. Broken down, this means you would need to multiply the annual earnings of Facebook by 89.55 times to reach the value of the current share price. By anyone’s definition that is a lot of ‘blue sky’ the markets have factored in for the Mark Zuckerberg’s company.

Facebook is due to post its second-quarter figures on 23rd July, and the markets are expecting adjusted earnings per share of 0.32 on $2.807 billion of sales, resulting in a pretax profit of $1.372 billion. More importantly the year-on-year adjusted EPS is expected to grow by 68%, with sales growth in the same period estimated to be 54.9% higher.

So we are looking at a company with some punchy expectations that saw its share price collapse to less than half its IPO price of $38 within the first four months, but managed to recover and trade above $70 in the following eighteen months and now sit just below this level.

As the largest quoted social media company, Facebook has had to figure out how to monetise the user base from its non-subscription website, something few have successfully done. Unsurprisingly there have been teething problems, as some of the data it has collated and sold on to third parties caused it to reword extensive parts of its terms and conditions. Even with the relatively young age demographic of Facebook users being lower than many websites, change has been reluctantly accepted and the emergence of adverts bitterly complained about. These growing pains are essential if the company deserves the valuations the markets have placed on it.

Regardless of what the Fed might think, the markets have been particularly supportive of the company over the last year. Judging by where the market expectations are for its next set of figures, the company is making serious progress towards meeting them.

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