I want to add a thought to my Facebook commentary that I posted earlier this week. Part of the reason why Facebook has seen its price climb from a low of $17.50 in 2012 to $97.54 now is that overall profits have climbed from $1.25 billion to almost $3 billion over that time frame. When people see the five-year charts of Facebook reporting 28% annual profit growth, they use it to talk themselves into paying a ridiculous valuation for the stock.
But what often goes unnoticed is this: Facebook makes most of its money from advertising revenues, and the 2010-2015 measuring period only captures an improving economy in which companies increased the amount of money earmarked for ad companies.
The current excessive valuation of Facebook probably reflects the fact that Facebook shareholders have never experienced what it is like to own an ad-reliant company during a recession.
Take something like … Read the rest of this article!