Yet, at its current price, Facebook Inc (NASDAQ:FB) is trading at an excessive valuation. Have investors gotten ahead of themselves, or is there room for further upside from here?
Facebook’s current valuation
Shares of Facebook are trading near $38, giving the social networking giant a price-to-earnings ratio of over 160, and a forward PE of nearly 38. For comparison, the broader S&P 500 index is trading with a PE ratio of just 19, and a forward PE of about 15.
Google Inc (NASDAQ:GOOG) may be the closest thing the company has to a true competitor. The search giant is trading with a PE ratio of about 25, less than one-sixth of Facebook Inc (NASDAQ:FB)’s, and a forward PE of only 17.
Stats don’t tell the whole story
But of course, these numbers don’t tell the whole story. Many stocks have traded at excessive valuations for years, and have continued to reward shareholders with higher prices.
Amazon.com, Inc. (NASDAQ:AMZN) is perhaps the quintessential stock when it comes to consistently “overvalued” companies. It technically has no PE ratio, as it reported a loss last week, but the metric has been as high as 3,500 in recent months. Based on analyst estimates, its forward PE is 108.
This isn’t a recent phenomenon — Amazon was voted the most overvalued stock of 1999. Although shares did tumble when the tech bubble burst, investors who bought in back then would still be sitting on a gain of over 340%, more than 10 times the return of the S&P 500.
Over the years, Amazon.com, Inc. (NASDAQ:AMZN) has been able to justify its excessive valuation because it just keeps growing. Rather than focus on returning capital to shareholders like a typical cash-generative, mature business, Amazon invests its money into new projects.
Recent initiatives include Amazon.com, Inc. (NASDAQ:AMZN) Web Services, which currently dominates the public cloud industry and could be worth $24 billion, and the Kindle Fire tablet, one of the most popular Android-based tablets in the world.
Can Facebook keep growing?
So can Facebook Inc (NASDAQ:FB) pull an Amazon and continue to grow? There’s reason to believe that it can. Even though there are now over a billion people on Facebook (a sixth of the planet), the company continues to add users every quarter, and is finding ways to monetize its large base with new initiatives like gift-giving.
And more of these are certainly possible. Consider Tinder, which is basically just a Facebook Inc (NASDAQ:FB) add-on. In less than a year, the mobile dating app has attracted millions of users, and seems poised to dominate the online dating world.
But more concrete is the company’s ability to monetize mobile. In an interview with Bloomberg, L2’s Scott Galloway observed that the company has been able to charge as much for its mobile ad products as it has for its desktop products — something that no other company has been able to do.
Facebook has no legitimate competition
By contrast, Google Inc (NASDAQ:GOOG) has suffered in the shift from desktop to mobile. Despite investing in Android, Google shares dipped earlier in the month after the company reported weak mobile ad revenue.
And Google Inc (NASDAQ:GOOG) is the only company with a truly competing product. Other social networks and apps exist (and new ones are appearing), but they largely satisfy different needs. Google+ is the closest thing to Facebook Inc (NASDAQ:FB), and the only site out there right now that could do to Facebook what it did to Myspace.
BTIG’s Rich Greenfield has been bearish on Facebook Inc (NASDAQ:FB), and has warned that Google+ could pressure the company. But last week, Greenfield admitted that he was wrong, and upgraded the stock from Sell to Neutral.
Google Inc (NASDAQ:GOOG) isn’t giving up on Google+, but it doesn’t seem likely that the service will replace Facebook anytime soon. On a pure numbers basis, it’s getting more users because the search giant is tying it in with its other services (like maps), but the people on it aren’t engaged.
In May, Reuters noted that while big brands may have Google+ accounts, they just don’t use them. Companies like Domino’s update their Facebook Inc (NASDAQ:FB) page on a regular basis; they ignore Google+ for months.
Investing in Facebook
Although Facebook Inc (NASDAQ:FB)’s current valuation may appear a bit excessive, other tech giants like Amazon.com, Inc. (NASDAQ:AMZN) have been overvalued for years, and have continued to reward shareholders.
Facebook has no legitimate competitors and has managed to succeed in mobile where other companies have failed. Although it has over a billion users, it continues to grow, adding and monetizing users who increasingly see Facebook Inc (NASDAQ:FB) as a regular part of their lives.
The article Is Facebook Overvalued? originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Inc. (NASDAQ:AMZN), Facebook, and Google. The Motley Fool owns shares of Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB), and Google Inc (NASDAQ:GOOG). Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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