Beginning of the end for Facebook – 2

By | July 30, 2018

4 months ago, I wrote about “The beginning of the end for Facebook” (here). In the past week, Facebook had its biggest drop since the company went public and lost approximately 20% of the company valuation one day. That among of market value is larger than 400 companies in S&P 500 index. Just pause here for a second: it is like more than 400 members of the 500-member index is gone in one day.

We watched this episode as a spectator. We never invested in FANG stocks and probably won’t invest in them in the near future, given the aggressive growth assumptions priced into today’s price for these stocks. When stock prices reflect very aggressive growth assumption, and when those growth rate is not realized, the repricing can be violent because the market in a panic mode will have difficulty to agree on what kind of new growth rate to settle into.

Without an anchor growth rate (or decline rate), Facebook’s valuation will be very volatile for an extended period of time. That is the problem of buying into stocks at prices assuming trees will grow into sky.

Just how ridiculous such pricing can be? Facebook is still delivering 20% year-over-year growth, this is not something to sniff at and however, the expected growth rate priced into the stock was over 30%! You had seen such assumptions a lot in Dot.com bubble period and you are seeing a lot of them now in FANG stock.

Facebook’s price today is still at May 2017 level, which is not something I considered cheap either. To successful executing our strategy, it is important to recognize what is considered “cheap” and what is not. Old warnings about not catching a falling knife is always right, but if the point you are catching is half way through, or the point you are catching is right before the ground, the outcome will be very different.

Knowing to buying low is first step. The value a manager is really delivering, is to know when it is really cheap.

For now, lots of stocks out there are not in that territory, yet. Sitting tight is sometimes better than buying dips on some FANG stocks.

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