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Facebook: priced for imperfection | Financial Times


Mark Zuckerberg’s smirking explanation to US lawmakers that Facebook was free to users because “Senator, we run ads” was only ever part of the corporate story. Facebook is not just an advertising company but a phone network, a would-be financial services company and an ecommerce group. Markets undervalue its earnings potential, ignoring its ability to sell multiple services to the same pool of users.

True, its big bets on virtual reality (Oculus), messaging (WhatsApp) and digital currencies (Diem) have yet to boost sales. Monthly active user growth has slowed a third from 15 per cent five years ago.

Even so, revenue rose 48 per cent in the first quarter of 2021. The operating margin jumped 10 percentage points to 43 per cent. Both beat expectations.

Since listing in 2012, Facebook has repeatedly been labelled expensive. Consider the price to earnings growth (PEG) ratio. Compare the then forecast price-to-earnings ratio to forward earnings per share growth after the IPO and the PEG ratio was 2.46, according to Bloomberg figures. Any figure over 1 is supposedly expensive. Facebook investors felt they were paying up for the social media group’s earning potential.

Today the PEG ratio is 1.1 looking out to 2022, using Lex calculations. This is a more reasonable trade off between the share price and projected earnings, if still a tad high.

Yet markets ignore Facebook’s potential to increase profits even if user growth continues to slow, thanks to its new shopping initiatives. Its Craigslist-like service Marketplace already has one billion visitors each month. This can be used as a springboard for further ecommerce. The company can build tools that allow sellers to use its apps to communicate with customers — for a fee. Building out a payment system would generate new sources of revenue from existing users.

The threat of regulation has not disappeared. But accusations levelled against the company of allowing interference in a US election did not dent profits. Facebook’s earnings can easily continue to defy expectations.

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