Figure out Facebook's share price

facebook logo over ipo Symbol 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.

  • Constantine von Hoffman On Twitter»

    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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