For months, investors worried that Facebook would lose its dominance in the industry considering the users' shift to mobile devices. However, the social networking site proved that it could also generate earnings through smartphone users. The increase in its revenue made investors speculate if the company is actually overvalued.
Facebook's advertising earnings from mobile users reached 41% in the second quarter with a revenue of US$1.8 billion. Its shares rallied to 30% after the release of its earnings report. This resulted in a US$38 stock price.
Venture capitalists examined the social network's PEG ratio to determine if shares at US$38 each were overpriced. The PEG ratio is defined as the price to earnings ratio divided by the company's growth ratio in a specified period. A PEG value higher than one would indicate that a stock was not exactly a bargain.
Facebook was anticipated to generate an adjusted income of 71 cents per year and report an average yearly revenue growth rate of approximately 23% within the next five years. Given the said formula, Facebook's PEG ratio would be 2.3. Investors said the figure meant that Facebook was not a reasonably priced stock. An average Wall Street analyst said Facebook's price must only be U$37 per share.
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