On the day that Facebook is floated I was asked whether they represent good value or are they another over hyped technology company.
First apologies for my use of unexplained jargon. A pe is a price/ earnings ratio. It measures a company’s capitalisation as a division of the number of years current profits.
In Facebook’s case they made roughly a billion dollars of profits last year.
According to the Financial Times today the approximate value of it’s total capitalisation may be just above one hundred billion dollars.
So dividing capitalisation by profits derives a pe of around 100.
The principal usage of the pe calculation is to compare stock investors’ valuation of one company against the hype of another company.
So for example another possibly overhyped company- the world largest company by capitalisation, is Apple Inc.
Apple’s current pe ratio is only 16. So they are less than 6 times underhyped.
“Value is in the pocket of the purchaser” is one of my favourite phrases.
To answer the question of hype or value- please consider whether you would prefer to invest your hard won cash in a company which is sitting on $100 billion in cash with products flying out of the door all around the world- or another where the other company is theoretically growing six times even faster.
Given the choice my money is with Apple.