On July 26, the day after posting an outstanding quarterly earnings report, Facebook lost $119 billion in market value – for the biggest single-day loss for a public company in history, according to Thomson Reuters. What’s behind the drop? Is it a buying opportunity, or should you un-friend the company stock before more sellers do?
By the numbers, Facebook is running an astonishing business. There are 1.5 billion daily active users on Facebook platforms (including Facebook, Instagram, and WhatsApp), making Facebook the clear winner in social networking worldwide. The year over year revenue growth at Facebook was up 42%, to $13.32 billion, with net income of $5.1 billion (up 31% over last year). That’s an operating margin of 44%. These are pipe dream achievements – something that Twitter or Snapchat (or Myspace back in the day) can only dream of. By comparison, Twitter was still cash negative last year and Snap Inc. lost $3.45 billion.
So what happened? Facebook reported that revenue growth will slow to only 20%-ish on the year. Costs are going to increase 50-60%, causing the operating margin to trim back to the mid-30s. Let me be clear. Revenue growth projections of 20% and operating margins of 35% are outstanding. That’s probably why, according to Reuters, “Of 47 analysts covering Facebook, 43 still rate the stock as “buy”, two rate it “hold” and only two rate it “sell”.” Their median target price is $219.30.” No U.S. social media company comes close to Facebook’s dominance. (There is a Chinese company that’s even more impressive, however.)
With a market capitalization of almost half a trillion, $42 billion cash on hand and $7.8 billion remaining in the Facebook share repurchase program, investors should feel secure that the company is going to be around for a long, long time. Despite Facebook’s clear command of social media, there is a concern about valuation – about the entire market in general – that could weigh on the share price. As Nobel Prize-winning economist Robert Shiller has warned consistently this year, “The only time in history going back to 1881 when [price to earnings ratios have] been higher are, A: 1929 and B: 2000. We are at a high level, and its concerning. People should be cautious now.” In fact, it was likely profit-taking, more than fear of the future, that prompted most sellers last week.
So, even though I’m bullish on Facebook – not at this price and not in the 10th year of an overvalued bull market. Americans aren’t unplugging from Facebook, and neither are analysts. However, making sure that your investments are balanced and diversified and not over-concentrated in any one area, even in something as hot as Facebook, is always a good idea.
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Natalie Wynne Pace is the author of the Amazon bestsellers The Gratitude Game, The ABCs of Money and Put Your Money Where Your Heart Is (aka You Vs. Wall Street). She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical). Natalie Pace’s great, great grandfathers James Pace and Lorenzo Wright were some of the original pioneers of Graham County. Call 310-430-2397 to learn more about Natalie Pace’s books, private, prosperity coaching, and 3-day Financial Empowerment Retreats.