Is Facebook Stock Overvalued Or Undervalued?

Facebook, Inc FB shares have outpaced the S&P 500 in 2021, generating a year-to-date total return of 24.5%.

Facebook is still putting up impressive growth numbers. But with a $977-billion market cap, some investors are wondering if there’s any value left in Facebook stock.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 33.9, more than double its long-term average of 15.9.

Facebook’s PE is currently 26.2. That number is below the S&P 500 average as a whole. It’s also down 56.3% over the past five years, suggesting its earnings multiple is on the low end of its historical range.

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Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.7. Facebook’s forward earnings multiple of 21.9 is only slightly higher than the S&P 500 as a whole, making Facebook stock look fairly valued.

Facebook’s forward earnings multiple is exactly in-line with its consumer cyclical sector peers, which are averaging a 21.9 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 1; Facebook’s PEG is 0.9, a very attractive valuation for a megacap tech stock.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.1, nearly twice its long-term average of 1.62. Facebook’s PS ratio is 9.3, not exactly a bargain value, but not a huge red flag for a growth stock.

Finally, Wall Street analysts see impressive gains for Facebook shares over the next 12 months. The average analyst price target among the 43 analysts covering Facebook is $425, suggesting about 25.3% upside from current levels.

The Verdict: At its current price, Facebook stock appears to be somewhat undervalued based on a sampling of common fundamental valuation metrics.