I continue to believe this market sell-off is overdone. But the good news is that the selling creates opportunities for patient, savvy investors. One of those opportunities lies in Facebook (NASDAQ:FB) stock.
From a broad perspective, I still see wonderful things ahead for the U.S. economy and U.S. stocks. Indeed, I’ve called this decade the “Roaring 2020s.”
Just this week, I cautioned investors not to panic, and recommended the Invesco QQQ ETF (NASDAQ:QQQ), which tracks the tech-heavy NASDAQ 100 Index. FB stock is that fund’s 6th-largest component — and after a 6.4% decline on Monday, one of the QQQ’s most attractive names.
After all, some level of sell-off in some part of the markets does make sense. It’s not terribly surprising, or illogical, that airline and cruise stocks have fallen. There are short-term macroeconomic factors to consider elsewhere in the market.
But FB stock now is down 24% from its highs for reasons that simply are difficult, if not impossible, to discern. This looks like a panic-driven sell-off. It will reverse.
Why Has FB Stock Fallen?
Investors reasonably could question the intensity of the respective reactions: both stocks are down over 50% from February highs. But for travel-related companies, there’s going to be an impact on both revenue and costs. Some reaction makes sense.
The same is true for casino stocks. Automotive manufacturers may see some near-term weakness. We may see cautious Americans pull back on buying new homes or big-ticket items this spring.
Generally speaking, I believe investors, as always, should take the long view. And I believe, as I wrote this week, that the American consumer and the American economy will not only survive, but thrive, going forward.
Still, I can at least understand why some investors might have those short-term fears, even as I hope they’ll work through them.
When it comes to Facebook, however, I’m not even really sure what even the short-term fears are supposed to be. Facebook revenues are based largely on three factors. The number of users; the engagement of those users; and advertiser demand.
Which of those three factors have changed? Users aren’t going to leave Facebook now. If anything, dormant users may return to check on friends and family. More broadly, engagement on social media platforms like Facebook and Twitter (NYSE:TWTR) should rise as Americans search for information.
It’s possible that short-term macro weakness could pressure advertising dollars. But advertisers probably would stick with Facebook’s targeted, cost-effective products and cut spending elsewhere.
Again, what is the short-term factor hitting Facebook’s near-term results? Unless investors are worried that travel-phobic users will post fewer vacation pictures on Instagram, I’m at a loss.
What Else Is Going On?
I don’t mean to make light of the current situation. Rather, I’m genuinely confused.
At its heart, the three platforms — Facebook, Instagram, and WhatsApp — are communications systems. Americans stuck indoors and looking for information are going to communicate more, not less.
That’s part of why Zoom Video Communications (NASDAQ:ZM) has rallied. It’s similar to the logic behind the relative strength in streaming service Netflix (NASDAQ:NFLX) before it succumbed to market pressure on Monday.
Yet it’s Facebook stock that declined over 15% year to date. Incredibly, it’s lost over $150 billion in market value since late January — and $125 billion in a month.
If it’s not pandemic fears, what’s the cause? Here, too, it’s almost impossible to discern. Investors did react somewhat poorly to fourth quarter earnings in late January. FB stock dropped 6% the following day. But it recaptured nearly all of those gains in the following sessions. That report already was priced in.
Some high-flying growth stocks, as well as companies dealing with heavy debt loads, have sold in a “risk-off” environment.
But Facebook has no debt, and $55 billion in cash and investments. At 19x 2020 consensus earnings estimates (which, by the way, haven’t moved much), and less than 17x backing out that cash, FB stock hardly has a nosebleed valuation. At its peak, when the stock traded for 25x consensus, the stock wasn’t expensive, either.
This is largely the same stock at $170 in March that it was at $220 in February. We know revenue growth is slowing, though it remains impressive given Facebook’s size. We know costs to secure the platform are rising, though not to the extent seen in 2019. (Remember that it was guidance for that elevated spending that tanked FB stock back in mid-2018.)
Yet we also know that one of the world’s best companies now is available for less than 17x earnings. We know that short-term fears are going to have minimal, if any, negative impact on the business.
What we don’t know is why this stock has fallen almost 20% in a month. But I don’t think investors need to spend much time figuring it out. This is a wonderful company at a dirt-cheap valuation. This is the kind of opportunity that doesn’t come along very often.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.