Facebook Inc (FB), while not the cheapest stock by traditional measures, is expensive for a reason. FB stock trades at about 70 times trailing earnings and 40 times 2015 earnings. Compare that to the S&P 500‘s 18.7 price-to-earnings ratio and 17 forward P/E ratio, and you’d think shares of the social media company were an absolute rip-off.
While I respect the school of value investing immensely, I also think you’ve got to give credit where credit is due, and Facebook’s growth potential simply merits a higher multiple.
One harp against the company has been the accusation that FB is losing popularity with the younger crowd as Facebook matures. The loss of the “coolness factor” has been a huge concern for shareholders.
It shouldn’t be.
Facebook: Still Cool by College Kids
After Facebook’s reach among college-aged internet users (defined as ages 18-24) falling nearly 3% in just a seven-month span last year, the critics had reason to worry about FB stock. But new data from comScore shows that number has rebounded in the last year, with Facebook’s reach jumping 3.9 percentage points.
More than 92 percent of college-aged internet users use Facebook. That’s a commanding market share, and it shows pretty convincingly that Facebook’s coolness factor is still wholly intact, taking away one of the most frequently cited bearish arguments against FB stock.
On top of that, the company is subtly yet aggressively moving against Silicon Valley rivals Google Inc (GOOG), LinkedIn Corp (LNKD), and Twitter Inc (TWTR).
Gunning After GOOG, LNKD, and TWTR
Last week I explained why I thought Facebook Search — a new feature that allows users to search for old posts from their News Feed — should have the Googlers in Mountain View, California worried:
“The three core reasons Facebook Search is a major threat to GOOG stock are as follows:
- Google can’t do it. Its social network, Google+, is a joke, so social results will be far less meaningful from GOOG.
- Less people would use Google if Facebook Search took off.
- With a smaller market share and with advertisers experimenting with FB, Google’s ad revenue would decline.”
FB is also rumored to be working on a service called “Facebook at Work,” aimed at professionals looking to collaborate and connect. If it sounds like a direct threat to LinkedIn, the current undisputed champion in the field of professional social networks, it is.
Add to that the fact that Facebook has integrated a “trending topics” area to the right of the News Feed that mimics Twitter’s trending hashtag methodology, and FB is swinging at all the right competitors.
And with the college-aged crowd still firmly behind FB despite Auntie June’s insistent friend requests, a few of Facebook’s swings may land.
John Divine is Assistant Editor of InvestorPlace.com. As of this writing, he held shares of GOOG stock and GOOGL stock. You can follow him on Twitter at @divinebizkid.
