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TheStreet Open House

Don't Even Think About Selling Facebook

NEW YORK (TheStreet) -- Although it's the top pick in social media, Facebook (FB) has not been exempt from the recent selloff in momentum stocks. Although its shares are up 8% year-to-date, they have tumbled over 15% since March 10, when the stock hit a new 52-week high. 

Facebook stock was trading at $58.60 late Tuesday, with a price-to-earnings ratio of 74. That's not cheap, per se, but in my view the price actually doesn't seem too expensive.

Based on forward-looking numbers for fiscal year 2014, the company trades at 40.5 times earnings. Lofty valuation, that is, until you consider that earnings per share and revenue are expected to grow nearly 65% and 51%, respectively. 

Look at other social media stocks. The valuations are much higher than Facebook. Yelp (YELP), Twitter (TWTR), and LinkedIn (LNKD) trade at 172.5, 131, and 59 times 2015 earnings, respectively. 

Facebook, on the other hand, trades at just 31.5 times 2015 earnings. Still not cheap compared to the broader S&P 500 (SPY) index, but Facebook's earnings are expected to grow much more rapidly. 

Facebook's 2015 earnings outlook is obviously based on -- you guessed it -- estimates. Meaning that, analysts are trying to pinpoint what earnings will look like in a year and a half. 

I wouldn't put much faith in those numbers, however. Facebook has topped analysts' estimates in each of the past four quarters, on average, beating by nearly 33%. 

If the last four quarters have shown anything, it's that the Street has had expectations that are far too low. Going forward, that's likely to remain the case. 

For those of you familiar with the price-to-earnings-growth ratio, or PEG ratio, you'll notice that Facebook is also cheap. A value of 1 in the PEG ratio indicates a fairly valued stock, while a measurement below 1 indicates the stock is inexpensive. Over 1 indicates the stock is expensive. 

Based on fiscal year 2014, Facebook has a PEG measurement of just 0.63. Based on 2016 estimates, the measurement is only 0.72. 

You're probably wondering why I skipped 2015, and I'll explain below. (For the record, the PEG for 2015 is 1.12). 

Analysts expect earnings to grow 28% in 2015, before growing another 33% in 2016. Why the drop off, though, from 65% in 2014 to 28% in 2015, before moving back to 33% earnings growth in 2016? 

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