Bigger. Better. Cheaper?
At first glance, the question framed in the article title might seem absurd. With hindsight, who wouldn't want to pay less for the same asset? However, that assumes that we're operating with the same information regarding the company to decide between two prices, which isn't the case if we place ourselves back in early September. Yesterday's fourth-quarter earnings release provided us with some important information regarding a key challenge: Facebook's transition into a "mobile company," to use CEO Mark Zuckerberg's expression.
The early signs are that Facebook is navigating the transition successfully. Mobile daily active users -- arguably the highest value users -- overtook web daily active users during the fourth quarter. The new focus on mobile advertising, which was little more than a speculative activity at the time of the company's IPO, is paying off: Mobile advertising accounted for 23% of total ad revenue -- Facebook's overwhelming revenue source -- in the fourth quarter, up smartly from just 14% in the previous quarter.
Judging by the market's reaction to Facebook's results, the shares already reflected all of the positive news contained in the release – and then some. Today's Facebook has a better foothold in mobile and, therefore, better earnings visibility than it did on Sep. 4, the day the shares bottomed. But is that worth a near 50% premium in terms of its price-to-earnings multiple (based on the consensus estimate for next twelve months' earnings-per-share)?
Perhaps, but that doesn't exclude the fact that the shares are overvalued today. Given the massive uncertainty concerning what Facebook will look like five years from now, it's tough to argue that paying 47 times for this year's earnings is anything other than a speculation, with the potential of significant, permanent capital loss.