If you’ve owned Facebook Inc (FB) stock for the entirety of the year, pat yourself on the back — you’ve done extremely well. Shares of the dominant social network are up more than 30% while the S&P 500 has managed a meager 1.2% return.
Now get out … get out of FB entirely. Or, at the very least, take some profit if you’ve got it, because the stock’s current levels are not sustainable.
There is a certain physics to the stock market, though Wall Street is admittedly governed more loosely than the trajectory of an asteroid or the entirely predictable orbit of our moon.
But there are still general rules in equities, and Facebook is not immune to them. FB has been flying too close to the sun, and sooner or later the wax in its wings will melt and the stock will plummet down to earth.
It’s Already Begun
I should note that I do believe Facebook will be with us for a long, long time, and the volume and quality of its data gives the company some extremely valuable and rare assets. That is, FB isn’t going to zero anytime soon, it’s just overvalued.
Trading at more than 36 times forward earnings, Wall Street is valuing FB at more than twice the 17.5 forward price-earnings multiple of the S&P 500. And traders are starting to realize something’s out of whack. After Facebook soared to all-time highs above $110 per share after third-quarter earnings, FB has been steadily slipping.
Its last closing price of $105.45 is awfully close to shares’ $102.78 50-day moving average, and at the time this article was written on Monday, shares were even closer to that dreaded $102.78 mark. If the FB stock price crosses its 50-day moving average on the downside, I expect we’ll see a flurry of selling that will bring shares even lower.
From a fundamental perspective, just where do investors think all the growth is gonna come from? FB already has 1.5 billion monthly active users, so any growth in its user base will be incremental and not very meaningful.
It’s also safe to assume that the majority of additional users from here on out will be from less developed areas, as a disproportionate percentage of the developed world is already using Facebook. In other words, users with a lot less money are worth far less to advertisers.
The hope for FB, then, is to squeeze as much out of first-world users as possible. But this is a tricky proposition, because it means that after FB has optimized its ads to the best of their ability, they’ll simply have to serve more ads if they want to grow.
Although Twitter’s (TWTR) problems are far more dire than Facebook’s, this is precisely the struggle that Twitter is dealing with now. Its user growth is almost nonexistent, and its platform is already entirely inundated with ads. The result is a series of sad, silly efforts to boost user engagement and a free-falling stock that’s down 30% in the last six months.
With interest rates likely to get a boost in December, I wouldn’t be surprised to see growth stocks like FB take a dive as investors adopt a more “risk-off” approach and shift their assets into more low-risk securities.
For Facebook at least, 2016 is not likely to look like 2015.
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