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Why Investors Love Facebook

Mark Zuckerberg congratulates Oculus VR CEO Brendan Iribe at Oculus Connect.Mark Zuckerberg congratulates Oculus VR CEO Brendan Iribe at Oculus Connect.
Mark Zuckerberg congratulates Oculus VR CEO Brendan Iribe at Oculus Connect.Randall Michelson

Facebook (FB) has defied the odds of consumer Internet startups. The vast majority of them reign for a brief period of time and then fall out of favor, shrivel up, and die. But 10 years in, Facebook has built a massive audience (1.55 billion) that few other companies can match. It has consistently grown that audience, despite its already-huge market penetration. And it has deepened user engagement, grabbing even more of their attention each quarter.

That’s rare enough, but Facebook has done that while building a wildly profitable and fast-growing business around its namesake product. And in areas where it looked weak, Facebook acquired several other very successful products and has so far managed to not screw them up.

Sure, it has come up short in its search and e-commerce efforts. Sure, its Snapchat clones have been lame. But those missteps haven’t hurt the company much. And yes, media companies are wary that Facebook is trying to “eat the Internet” under the guise of offering help. But they’re still eager to partner with the company. Facebook’s biggest black eye right now is its unpopular Internet connectivity efforts in India, and that’s not even directly related to the business.

Whatever you think of the company, its executives, or the product, Facebook’s trajectory is impressive. Investors have rewarded the company for it—so much so that Facebook stock looks pretty expensive. Today Facebook is worth $292 billion. That’s a 114x price-to-earnings ratio. For context, Google (GOOG) trades at 35x. Apple (AAPL) trades at 13x. Walmart, the biggest company in the world, trades at 12x.

Part of that is because Facebook’s profit margins (32% this quarter) are enviable. And part of it is because Facebook is still in growth mode. It’s easier to post 45% revenue growth, as the company did in its third quarter earnings report Thursday, from a revenue base of $3 billion than it is from $120 billion (Wal-Mart’s revenue last quarter).

But the biggest reason investors are so bullish on Facebook is because the company’s next generation of revenue sources is ramping up. Beyond the core Facebook platform, Facebook Messenger, Instagram, and WhatsApp have huge audiences. As businesses, they’re tiny if nonexistent. (Only Instagram has started to monetize this year.) But investors expect all of them to become huge sources of revenue for the company.

facebook user numbers
Courtesy Facebook

Once upon a time, the analysts on Facebook’s earnings calls would ask about things they viewed as risks. Is Facebook losing the teens? Can it figure out mobile? Will privacy concerns scare users away? Do its ads actually work? Will advertisers revolt every time the News Feed algorithm changes?

Facebook has managed to shake off almost all of those concerns. Over the last year, analyst questions have shifted away from concern and risk and to softballs about Facebook’s glorious plans for the future. They ask: How big is your app-install business? How expensive can your ads get? When will you blow our minds with Oculus VR? How rich will Instagram make us all? How big a Scrooge McDuck vault should we acquire for all that sweet video coin you’re going to mint? On a scale of one to totally, how much are you dominating mobile advertising?

By valuing Facebook at $292 billion, investors are trusting that its many “next generation” bets will pay off. And why shouldn’t they? Ever since its disastrous IPO in 2012, the company has shown that, despite the occasional controversy, it can deliver results.

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You can follow Erin Griffith on Twitter at @eringriffith, and read all of her articles here.