Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Cancel Anytime
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

Paul Sakuma/The Associated Press

If you thought Facebook Inc.'s first year as a public company was tough, get ready for a demanding Year Two.

In the first year, the company faced the challenge of generating significant revenue, and it succeeded: In the first quarter of 2013, sales rose 38 per cent, to nearly $1.5-billion (all figures U.S.).

The cash flowed from a shift in the company's focus – away from trying to attract more and more users to its social media site, where people post updates on their lives, and toward squeezing more money out of this massive user base, which now stands at 1.1 billion people.

Story continues below advertisement

These revenues are still largely driven from desktop computer advertising, though Facebook has been diversifying. As more its users have moved to accessing their Facebook accounts from their smartphones and tablets, the company has increased mobile advertising, which now accounts for 30 per cent of sales.

But however successful Facebook has been in turning dollars out of users, it still faces a daunting task: It has to justify the chasm between its share price and its earnings.

This has been a sticking point even among observers who appreciate the company's business model and accept that Facebook's enormous popularity makes it virtually unassailable by upstarts. Its trailing price-to-earnings ratio is more than 1300. The P/E multiple on the Nasdaq composite index is 25.

With earnings growing rapidly, Facebook's P/E ratio is expected to shrink fast. According to analysts' estimates, Facebook this year should generate earnings of 57 cents per share after accounting for some extraordinary items, and rise to more than $1 a share by 2015.

If they're right, and Facebook's share price doesn't move, the P/E will fall to 46 by the end of 2013 and 24 by 2015.

While that might look like a reasonable valuation for an exciting company with big growth ahead, it puts a lot of pressure on Facebook management to get things right – perfectly right.

Judging from the share price performance in the first year, there is not a lot of patience for setbacks. The slightest whiff of Facebook users losing interest in the site – raising privacy concerns or balking at Facebook's attempts to commercialize something – has often hurt the stock.

Story continues below advertisement

Indeed, one of Facebook's biggest problems is trying to transform the company into a big money-maker without alienating those who use the site or discouraging future users.

For sure, the share price already reflects these issues to some extent. At Friday's close of $26.25 on Nasdaq, the stock is down 31 per cent from its IPO price a year ago.

Over the next year, Facebook will have to convince investors that this poor debut is unwarranted. Getting everything right – especially earnings growth – will merely prove that the current share price makes sense.

To drive the share price higher, it is going to have to expand the business well beyond a social media site, just as Google moved beyond its start as a search engine.

The company has been making some bold moves. It bought the photo-sharing company Instagram last year and recently introduced new software applications, called Home, to make Facebook easier to access and use on Android smartphones.

But a bet on the stock requires a big leap of faith.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies