The giant premium investors are putting on the shares of Facebook has given the social network one of the largest market values in the world.
By overtaking US industrial giant General Electric yesterday, Facebook cracked into then top 10 of the S&P 500, the benchmark US equity index.
The rise is remarkable. Facebook is up 26% so far this year and 46% over the last 12 months. It’s also given Facebook a price-to-trailing earnings ratio of 95. That’s a nosebleed level—fairly valued is traditionally seen around 15 times earnings—that should give tech investors pause. And by tech investors, we mean everybody. Since the top ranks of the S&P 500 index are now crammed with technology outfits, most passive index investors are increasingly exposed to the vicissitudes of tech stocks.
With investor optimism about Facebook so high, any relatively minor deviation from a rocket-charged growth path can send shares plummeting. Facebook is slated to report its next quarterly earnings update on July 29. Hold tight.