2017-03-16 / The Motley Fool

Ask the Fool

What’s Fair for Facebook?

Q: I see that Facebook has a market value near $400 billion. Isn’t that pretty high?

— E. M., Walnut Creek, California

A: It depends on how Facebook is performing and what you think its prospects are. A company’s value is largely in the eyes of its beholders.

With Facebook, you might check out a few numbers to assess its value. Its price-to-earnings (P/E) ratio, for example, was recently 39. That’s far steeper than the S&P 500’s recent P/E in the mid-20s, but Facebook is growing much faster than the average company. Its revenue in 2016 topped $27 billion, up from $18 billion in 2015. Over the same year, profits surged from $3.7 billion to $10.2 billion. Fast growers tend to sport steep P/E ratios.

For more context, consider the approximate recent market values of Apple ($730 billion), General Electric ($265 billion), Google parent Alphabet ($575 billion) and Amazon.com ($400 billion). Looking at those, does a $400 billion value for Facebook seem reasonable? Think about how reliable its expected earnings and growth rates are, and how sure you are that it will still be around in five or 10 years.

Facebook is not without risks, such as falling out of favor, but many investors expect it to successfully generate revenue from its daily users, who number more than 1 billion. (The Motley Fool owns shares of and has recommended Facebook.)

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— F. L., Houston

A: The simplest way is online. Enter the company’s name into a search box at many major financial websites, such as finance.yahoo.com or caps.fool.com, and you’ll get the symbol. You’ll likely find much more information on the company there, too. ¦

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