Facebook (NASDAQ:FB) stock and the company itself are again at the center of controversy and increasing calls into its business practices. The company is no stranger to having accusations of being an anti-competitive monopoly levied at it. Lawmakers are again seeking information concerning competition in the digital marketplace. They have sought comments as testimony from the CEO’s of Facebook, Alphabet, and Apple as part of a mounting probe into industry competitiveness.
Lawmakers will certainly leverage partisan rhetoric in that conversation, but the issue will be competition, not politics. Interestingly, Facebook has also found itself at the center of a heated conversation which has polarized everyday Americans along political lines. The core concerns Twitter and its recent decision to fact-check President Trump’s tweets and Facebook’s decision not to do the same. And while Facebook is not censoring Trump’s words, it did remove the pages of groups protesting the novel coronavirus lock down.
Facebook Stock Subject to Political Will
These companies’ decisions have sparked anger and disapproval from both left and the right. Trump has struck back at these social media giants with an executive order regarding potential censorship.
While these events will certainly have material effects on Facebook’s performance in the coming quarters, I am not going to rehash them in this article. For InvestorPlace coverage of those issues, check out how much enthusiasm for Facebook Nicholas Chahine currently has. InvestorPlace’s Larry Ramer also does a thorough walk through of the legal implications.
Rather, this article will focus on a few valuation measurements and where Facebook falls relative to comparable firms in the interactive media industry. Readers like you can use these quantitative measures to help balance your judgment against more subjective considerations such as legal issues facing the firm.
Does Facebook’s Stock Lead Interactive Media?
Facebook is a leader in the interactive media industry. Consumers will quickly throw their name into any conversation about the industry. The company has enjoyed a successful run as has its stock. But how does Facebook’s stock stack up industry-wide in terms of P/E ratio, one of the most basic valuation measures?
Investors should remember that P/E ratios indicate a few things and that they vary from industry to industry. While P/E ratio calculation is straight-forward, the resultant number is deceptively powerful. The calculation is simply Market Value Per Share / Earnings Per Share.
From this simple calculation investors can glean the earning power of a share of equity in a given firm. Investors can also use P/E ratios to judge if a given share is undervalued or overvalued relative to its peers and industry. So, let’s take a look at Facebook’s largest competitors and how they stack up in terms of P/E ratios. Facebook’s main competition includes:
How FB Stock’s P/E Ratio Stacks Up
Twitter (NYSE:TWTR) is Facebook’s primary competition in social media. Remember, Facebook now owns Instagram. Twitter’s current P/E ratio is 21.39 as per Gurufocus. This ranks them better than 60% of peers in the same sector.
Google (NASDAQ:GOOG) is Facebook’s primary competition in online advertising. Their current P/E ratio is 29.12. The industry median is 28.01, which indicates Google is slightly worse than average. Remember, a higher P/E ratio means investors pay more for a share of stock relative to its earnings. Generally, we want to pay less. Facebook’s P/E ratio is 32.26, meaning the company ranks better than 44% of industry peers in this metric.
Expectations For FB Stock’s Forward P/E Ratio
Analysts also calculate a forward-facing prediction for P/E ratios. Forward P/E ratios for Facebook, Google, and Twitter are 32.58, 34.41, and a whopping 70.49, respectively. This very high number for Twitter can tell investors something about how current events can affect stocks. Which is, that analysts have pegged Twitter’s forward P/E ratio at such a higher number is likely due to future earnings concerns. Analysts are worried that political will is going to stifle Twitter’s earnings in the future.
Takeaway On Facebook Stock
Political will is an ever-evolving beast. As it changes, viewers can get a clearer picture of the effects it will have on a given issue. Facebook’s problems are mounting, but we should remember that the company has faced scandals in the past and come out stronger. I cannot give a prediction as to what lawmakers will find in terms of Facebook being anti-competitive. Lawmakers have been questioning the company for some time and as we learn more we will see that filter through to the share price.
Regarding the discussion on P/E ratio, investors should have some clear takeaway regarding current events. While both Facebook and Google have slightly higher ratios, that is actually a positive indication. Investors are willing to pay more for a dollar of their respective earnings because they fundamentally believe these companies will continue growing. Put differently, Facebook and Google do not have higher P/E ratios due to low earnings. Facebook’s forward P/E ratio does not reflect the same fear that Twitter’s does but investors should keep a keen eye on both ratios and news in coming weeks. Both are sure to be reflected in Facebook’s price movement.
