On Friday afternoon, large-cap tech stocks tumbled, among them Facebook Inc (NASDAQ:FB). At one point, FB stock fell nearly 5%. Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) all tumbled as well. In fact, both AMZN stock and GOOGL stock fell under the $1,000 level both had hit with some fanfare over the past few weeks.
Facebook stock was just one of many tech giants to fall in a surprisingly large move.
The sell-off seems generally related to fears that the FANG stocks or “FAAMG stocks” or whatever acronym analysts are using have become overvalued. With AAPL, AMZN and FB stock all up more than 20% year-to-date, and torrid gains at other tech mavens like Netflix, Inc. (NASDAQ:NFLX) and Tesla Inc (NASDAQ:TSLA), those fears make some sense. From here, TSLA, NFLX and even GOOGL look varying shades of overvalued.
But Facebook stock seems like the baby thrown out with the valuation bathwater. FB stock isn’t expensive, at least relative to AMZN or TSLA. And that’s just one of the reasons why investors should buy the sector-driven dip in Facebook stock.
Facebook’s Social Media Dominance
The biggest risk to Facebook stock is that at some point, its social media dominance will erode. There’s an essentially binary view here. Either FB stock has one of the greatest ‘moats’ in all of business — everyone will want to be on Facebook because everyone else is on there — or Facebook will be the next Myspace (or something close), eventually being eclipsed by another, better platform.
One of the reasons FB stock has gained steadily over the past few years is that investors increasingly are dismissing that risk. And with good reason. In Facebook’s first quarter, it grew its user base 18% year-over-year. Snap Inc (NYSE:SNAP) grew its 36%.
But, of course, Snap’s user base is far, far smaller. Per its first quarter report, Facebook added roughly 190 million DAUs (daily active users) Snap Inc’s DAU base in Q1 was … 166 million.
In other words, in one year, Facebook added an entire Snap user base — and then some. Say what you will about SNAP’s valuation, but the idea that Snapchat is a legitimate threat to Facebook and Instagram seems unfounded at this point.
Online Advertising Growth and FB Stock
One of the former risks to Facebook stock was the necessary transition to mobile. Many online advertisers, among them Alphabet (for a while) and Yahoo! Inc. (NASDAQ:YHOO), struggled with the shift to smaller screens and less digital real estate for advertising.
Clearly, Facebook has solved that problem. Advertising revenue increased 57% in 2016, and another 51% in Q1. Mobile advertising drove 85% of the first quarter total.
That growth has created enormous operating leverage. Facebook’s profit margins were 45% in Q1, a simply huge number. They will only go higher, since the incremental cost of more users and more advertising dollars is so small.
Meanwhile, those advertising dollars should continue to come Facebook’s way — since there’s nowhere else to go. The online advertising world is a mess, between click fraud, measurement errors (admittedly, Facebook has had a few itself) and other issues. Alphabet is dealing with an advertiser boycott of its YouTube unit. TV viewership is both declining and fragmenting.
Facebook is the dominant advertising platform in the world right now. That’s something to keep in mind when considering Facebook stock.
Facebook Stock Is Not Expensive
I’ve made this point before, but it’s worth reiterating. FB stock now trades at about 25x 2018 analyst EPS estimates plus cash. The Coca-Cola Co (NYSE:KO) trades at 22.8x 2018 estimates.
Coca-Cola is a declining business. And while it could be that KO is overvalued — not necessarily that Facebook stock is undervalued — the point is that FB stock isn’t exactly priced for torrid growth. It’s not TSLA, or AMZN, or even Nvidia Corporation (NASDAQ:NVDA). Investors still are pricing in some risk and a relatively near-term slowdown in earnings growth.
There’s not much evidence of either arising, and certainly not any time soon. And if Friday afternoon’s sell-off was driven by valuation fears, then FB shouldn’t necessarily have been included. I like AMZN around $1,000, but I can see why investors might get nervous about an 84x forward P/E multiple. TSLA is being valued on profits that won’t come until the next decade.
But Facebook stock isn’t some high-flying, high-multiple growth story. It’s a reasonably valued growth story. And now, that growth story is on sale.
As of this writing, Vince Martin has no positions in any securities mentioned.