Facebook – The Trillion Dollar Business?

Have you seen the film The Social Network? It’s the one about Facebook founder Mark Zuckerberg, where Jesse Eisenberg stars in the lead role and muses about wealth. “A million dollars?” he says and shrugs. “But a billion dollars… that would be cool.”

The Social Network was released in 2010. But, just eleven years on, scriptwriters may need to add three (yes, three!) more zeros.

At the end of June, Facebook won a legal battle against US regulators, prompting its shares to rise 4.2%. In doing so, it’s valuation soared past the $1tn mark – the last of the big five tech companies do so. Facebook now joins Amazon, Google, Netflix, and Apple (FAANG as they are collectively known) at this significant milestone. 

A trillion dollars equates to a staggering £729bn. But is Facebook worth that much? It is an interesting question for many investors, with traditional ways of valuing companies increasingly seen as irrelevant.

Past Lessons

In the not-too-distant past, investors were concerned about a company’s price/earnings (PE) ratio. They focused on a company’s share price relative to its earnings-per-share. A high PE ratio usually suggested a company that was growing quickly. But one that was too high, especially when compared to other, similar companies, often made investors wary.

Then there was the dividend yield, a simple ratio showing how much a company paid each year in dividends relative to its share price. Investors looking for income went for solid companies with a good dividend yield. Investors looking for growth would accept a lower dividend yield, especially if the company was reinvesting profits, rather than paying them out in dividends to shareholders.

Underlying both these traditional measures was, of course, the belief that a company’s job was to make a profit.

The Here and Now

How times change! When Uber went public in 2019, it did so freely admitting that despite its 91m users, “it may never make a profit.”

Such a statement would have been incomprehensible to a traditional investor. If a company never makes a profit, how can it pay a dividend? If it never makes a profit, how can it even continue in business?

What does this mean for Facebook?

Facebook, of course, does make a profit. In the first quarter of this year, it reported revenue of $26bn (£19bn) – and increase of 48% on the previous year. The company’s net receipts rose 94% to $9.5bn (£6.9bn) as the average price of its ads increased by 30%.

However, it does have to be said that many companies with spectacular valuations don’t make a profit. They are valued on expectations of future profits, on potential market share and on their perceived ability to disrupt traditional markets.

All this, inevitably, makes life difficult when it comes to investing. Fund Managers will now be looking more carefully at potential future results rather than what’s happened historically. But, inevitably, matters will be further complicated by the changes the pandemic has brought about. To think of a company in the future being valued at a quadrillion dollars may sound unthinkable. But, pause for a moment and reflect. There was also once a time when the same could be said about a trillion!

Chris Page

Written by Chris Page

Chris is an experienced financial service professional who joined the business in 2013, as a result of his hard work and dedication he was made a director of the firm late 2014.

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