Facebook (FB) stock is putting on one heck of a show lately. Shares have soared roughly 40% since the start of 2014, helping FB to total gains of about 75% during the past 12 months.
As a result, shares of Facebook stock are sitting at all-time highs just under $78. And while there are plenty of factors in this mega-run, the biggest catalyst is simple: mobile.
In case you missed it, Facebook blew away expectations in its most recent earnings report, largely thanks to killer mobile ad sales.
How killer? So much so that a story by Derek Thompson of The Atlantic was justifiably titled “Facebook Is Eating Mobile,” which also reflected on the fact that when Facebook went public a couple of years ago, “we all thought mobile was eating Facebook.”
That’s the good news.
The bad news, though, is that the general consensus has shifted from concerns about mobile to another big red flag: valuation.
Is Facebook Stock Set for a Fall?
Thanks to the big-time gains Facebook stock has in the books, many experts have begun calling it a bubble stock and criticizing its price. Heck, last week, more upward movement put Facebook’s market capitalization at more than $200 billion, making one of the top 25 largest companies in the world.
Facebook stock looks frothy on many fronts — a trailing 12-month price-to-earnings ratio of more than 100, a forward P/E of nearly 40 and TTM price-to-sales of more than 20. Using that $200 billion valuation, though, Facebook stock looks a bit frothy. And, the bigger problem … that number might not even be the right one to use. As The Wall Street Journal explained:
“The risk this presents is compounded by the fact that many enthusiastic investors may not be valuing Facebook correctly to begin with. The company’s market value using its diluted share count is about $200 billion. That includes stock issued to complete its purchase of Oculus VR in July. On that basis, Facebook trades at about 12 times consensus estimates for 2015 sales.
But even that heady level doesn’t include the roughly 184 million shares and 46 million restricted stock units Facebook will issue when it closes its WhatsApp deal. The company expects this will happen before the end of the year. Adding those to the share count brings Facebook’s market value, at its current price, to nearly $217 billion — or more than 13 times 2015 sales.”
Tack on a slowing growth rate, and it’s no surprise that many folks are saying to be prepared for looming Facebook stock disaster.
Sure, Facebook still boasts a darn impressive growth rate, mind you … but investing is a game of expectations. When you have a high premium and high expectations, the slightest slip can mean panic.
Then again, Facebook stock is no stranger to haters — and the same story can be told for the social media site itself. Yet both the company and its publicly traded shares have continued to defy critics. Sometimes, a stock is simply hot, and investors are willing to pay a premium to be a part of the ride. So, sure, there could still be plenty more upside for Facebook stock before any kind of bumps appear in the rode.
But don’t jump into Facebook stock without realizing that there will be bumps — and they could be coming sooner than many folks would like to admit … mobile momentum aside.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.