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Why do people buy FB if its price isn't justified by P/E?
03-30-2014, 01:56 PM
Post: #1
Why do people buy FB if its price isn't justified by P/E?
I just read that Facebook reported earnings of $0.19 and last quarter, their results were $0.12. If you add these two numbers, you'd get $0.31. If you can expect them to continue their results, they'd make $0.62. The stock price is now $34.36. This means that, if you buy the share at market price right now, and you can expect the year's results to yield a $0.70 of EPS, then you're paying nearly 50 times earnings for a share. This seems insane. Is this just the speculation Ben Graham talked about?
I'm asking this because I'm a Ben Graham disciple, and he always said that if you paid more that 20 times earnings for a stock, you are speculating. Would that apply in this case, or is Facebook considered a growth stock now that it is expanding its mobile business. I'm sorry if this question sounds stupid. I'm just 14 and I want to test out my understanding of Ben Graham's philosophy. Thanks and sorry for the trouble.

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03-30-2014, 02:11 PM
Post: #2
 
I think many investors use different reasons for their investing or trading activities. They could be based on fundamental analysis - but different from yours, or on technical analysis or other reasons. And finally there is also a lot of people using only emotions and nothing else.

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03-30-2014, 02:24 PM
Post: #3
 
PE shouldn't be the only number you look at as it can be manipulated by various factors. EG 4 quarters ago fb made like 0 profit because of an acquisition so next quarter this PE ratio will drop significantly if fb has even a normal or sub-normal quarter profit wise. Look at chinese solar stocks a few years ago. They had great PE due to manipulation of how they do accounting meanwhile their stocks all plummeted and many big companies started going bankrupt.

Even so companies expected to grow fast can justify a higher PE because that number can change significantly. If FB figures out a way to get most users to give them 5 dollars a year they're significantly undervalued and the PE becomes a low number overnight.

On top of that the market isn't always rational. Many people don't have that view of investing and stocks will go a lot higher than even Facebook has gotten with regards to PE.
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03-30-2014, 02:36 PM
Post: #4
 
1) Why should P/E of 20 apply throughout time? In the early 80's you could get 10% on risk free bonds and now you can get 2% on risk free bonds, but P/E =20 rule applies in both situations?

2) Why should you ever apply some backward looking metric to a fundamentally growth oriented investment?

3) FB is a story stock. If you believe one story it is worth $50. If you believe a different story it isn't worth even $0.50. I personally believe story 2, but I think the whole concept of FB is stupid and lots of people disagree with me.
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03-30-2014, 02:48 PM
Post: #5
 
Then why not sell it when it was 19? Why not sell it when it was 25? Alot made that mistake.
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