Why are Investors In Love with Facebook Stock?

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By Jacob Maslow

Facebook Profile On Apple Iphone 5SWith the price per earnings ratio of 76, you would think that a lot of investors would think twice about investing in the social networking giant Facebook (NASDAQ:FB). Well, it appears from its current stock appreciation trajectory that this is not going to happen anytime soon.

The reason why investors seem to be so madly in love with Facebook stock can really boil down to one thing and one thing alone: The company is innovative. Facebook seems to be stuck in this mode where it’s throwing spaghetti on the wall and just hoping something will stick. While this strategy might be fatal for a smaller company, Facebook does generate billions of dollars in sales every single year. Moreover, as it integrates video and becomes more aggressive in its data services and other non-advertising revenue streams, expect its earnings to continue to climb higher and higher.

Thanks to all these favorable movements, Facebook stock is getting richly rewarded by Wall Street. Compared to Google, Facebook shares are up 44% while Google has not really gone anywhere. It actually dips down from time to time.

More fundamental investors might be shaking their collective heads at all this because Google makes waymore money. In terms of revenues, Google earns $66 billion compared to Facebook’s measly $12.5 billion. In terms of profitability, Google blows away Facebook because it racks up $14.4 billion in profits while Facebook only generates $2.9 billion. Regardless of these very disturbing comparative numbers, Facebook stock is around 62% of Google’s market valuation.

That’s how deeply in love the market is with Facebook. That’s the allure of constant invention and innovation as well as Facebook’s well-documented strategy of buying its way into growing sectors like mobile which has cemented its reputation as an innovation company.

I think the real parallel is not so much between Facebook and Google during Google’s younger years. I think the real parallel here is between Facebook and Yahoo. Yahoo used to be the darling of Wall Street and even though most of the companies that it shelled out billions of dollars for turned out to be crap, Wall Street kept rewarding Yahoo with high market valuations until it finally crashed back to earth. Unless Facebook could really reinvent itself and totally deliver on this ever connected data platform big picture strategy it has for itself, it might yet turn out to be another Yahoo.

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