Facebook Inc (NASDAQ:FB) closed yesterday at $159.69, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s look into this by assessing FB’s expected growth over the next few years. View our latest analysis for Facebook
Can we expect FB to keep growing?Facebook’s growth potential is very attractive. Expectations from 42 analysts are extremely bullish with earnings per share estimated to rise from today’s level of $5.488 to $10.436 over the next three years. This results in an annual growth rate of 18.38%, on average, which illustrates a highly optimistic outlook in the near term.
Is FB’s share price justified by its earnings growth?
FB is trading at price-to-earnings (PE) ratio of 29.1x, which suggests that Facebook is overvalued based on current earnings compared to the internet industry average of 27.76x , and overvalued compared to the US market average ratio of 18.28x .
After looking at FB’s value based on current earnings, we can see it seems overvalued relative to other companies in the industry. But, to properly examine the value of a high-growth stock such as Facebook, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 29.1x and expected year-on-year earnings growth of 18.38% give Facebook a higher PEG ratio of 1.58x. This tells us that when we include its growth in our analysis Facebook’s stock can be considered a bit overvalued , based on fundamental analysis.
What this means for you:
FB’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Is FB’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has FB been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of FB’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.