Figure out Facebook's share price

CBS/AP

(MoneyWatch) This post was updated on May 22, 2012.

Facebook (FB) reported a net income of $1 billion last year. In order to get the P/E ratio for the company, we then divide the number by the total number of shares. So 1,000,000,000 divided by 2,140,000,000 = a price-to-earnings ratio of 0.467.

Now is when the guesswork comes in. Stock prices are multiples of that number.

The NASDAQ's current average P/E ratio is 27.9. So 0.46 times 27.9 equals a share price of 13.05.

If we leave out the current decade's ridiculous P/E ratio, we see that historically the average ratio is 16.5. So 16.5 times 0.467 = 7.72. Again, Facebook's IPO was undervalued, but only by a bit.

Apple's current P/E multiplier is 13.8, because people really, really like Apple and because it is making a lot of money. So 0.467 times 13.8 = 6.45.

But 13.8 is for the hottest company on the planet -- one with a long track record of earning money. So you might want to go with a lower multiple, especially for a company that's just gone public. If you think it's actually going to be a lot harder for Facebook to monetize all the data it has then you might suggest P/E of let's say 12. That is a P/E that most companies would be OK with. 12 times 0.467 = 5.61.

In an earlier version of this post I wrongly used the number of shares sold to determine the P/E. I sincerely apologize for my mistake and am very grateful to the reader who corrected me. Please see his comment below.

[tom94555b]

Your calculations have some serious mistakes. The price/earnings ratio (P/E) is the market cap divided by yearly earnings. The market cap is the price per share times the total number shares. The total number of shares for Facebook is 2.14 billion not 421 million (421 million is the number of shares sold in their IPO.) At their current price of $34 per share, Facebook has a market cap of $73 billion and a price/earnings ratio of 73. Here are the price per share for Facebook at the price/earnings ratios mentioned in your article:

P/E = 27.9 --> price/share = $13.05
P/E = 16.5 --> price/share = $7.72
P/E = 13.8 --> price/share = $6.45
P/E = 12 --> price/share = $5.61

The word "price" in price/earnings ratio refers to the total price of all of a company's shares, in other words, the market capitalization.

[CvonHoffman]

You are so very very right and I am very embarrassed. Thank you for pointing it out. I should have realized my calculations were off when I got such high valuations.