The dust seems to be slowly starting to settle after Facebook’s disaterous IPO. Now comes the question, where should Facebook really be trading at – especially when compared to its peers?
Currently Facebook’s P/E ratio is under 50 while LinkedIn’s (“LNKD”) P/E ratio is around 120.
A brief explanation on P/E ratios from Investopedia:
Investopedia explains ‘Price-Earnings Ratio – P/E Ratio’
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn’t tell us the whole story by itself. It’s usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company’s own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.
The P/E is sometimes referred to as the “multiple”, because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.
As an active user of both, I personally see more potential long term growth from Facebook than LinkedIn. So perhaps LinkedIn is a bit overvalued and Facebook is a bit undervalued? Maybe their P/E multiples should meet somewhere in the middle?
Just my two cents….