How is Facebook Addressing the Issue In The Short-term?
What Facebook’s management has been doing is astutely lowering expectations, which have been growing disproportionately with each quarter.
The phenomenal growth of Instagram will still provide a lot of support in the short term for Facebook, and then there is WhatsApp to think about in the long term, but the real problem for Facebook lies in the current valuation the market has assigned them. Hence, the attempt to lower expectations.
The FB stock is currently trading at 13.3 times sales and 44 times earnings. Most of these growth factors are already priced into the stock, leaving hardly any room for error. Hypergrowth stocks do attract higher valuations than other companies because they are expected to grow faster than their peers. As a result, the stocks remain volatile, moving sharply on any news that breaks. (See also: FB Stock: Facebook Inc Has Problems, But Then, Who Doesn’t?)
The Positive Long-term Outlook
But you have to be wary of one thing. None of this means that you can happily go and short Facebook’s stock. That is extremely risky because you never know when some of these products which are yet to be monetized will start to roar into life. One move by Facebook to monetize WhatsApp could send the stock soaring again, wiping out your short position.
There’s also one more ace up Facebook’s sleeve that isn’t widely known – the fact that they can easily increase their user base inorganically by adding more standalone apps. It’s something they’ve been doing ever since spinning off their core web platform’s chat functionality into Facebook Messenger to take advantage of the ongoing shift to mobile-based media consumption.
Each of these apps potentially adds another platform for monetization. It also helps reduce their overall ad load. Sponsored Messages on Facebook Messenger is just one such example which was rolled out to all advertisers last month.
By getting advertisers to sponsor messages, Facebook offers a way to further target existing ad viewers who engage with the company on the messaging app with highly relevant (and, more importantly, paid) messages. Greater relevance obviously means higher engagement and click-throughs, which translates to more revenue per advertiser and, subsequently, per user.
Facebook’s underlying fundamentals are very much the same but the valuation is still a bit over the top. So, if you are a long-term investor you can still add to your position as the stock shows some weakness, like what happened in November. But the best way to get in at this point is by looking at a five-year period during which you should add stocks in small chunks, instead of plowing all your money in one go and working without any margin for error.
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The article Shorting Facebook Inc. (FB) Stock Now Could Be a Disastrous Move originally appeared on amigobulls.com. Watch our analysis video on FB.
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