Facebook, Inc.'s Awful Week: What You Need to Know

Facebook stock fell again this week. Here's the backstory.

Apr 5, 2014 at 1:30PM

Facebook (NASDAQ:FB) stock fell 5.4% during the week and 17.5% in the past thirty days. The sell-off seems to be inspired by both broader concerns in the market for the valuations of the Street's trendiest growth stocks as well as worries about Facebook's latest acquisitions. Is the sell-off a buying opportunity? Or are these concerns legitimate?

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Facebook's mobile app. Image source: Facebook.

Is Facebook overvalued?
Possibly.

Not only does Facebook trade at a lofty valuation relative to the overall market, but Facebook even looks expensive when compared to its social peers. LinkedIn, for instance, trades at 12.9 times sales. Facebook? 18.1 times sales -- a premium to sales very few companies trading on the stock market can match.

Sure, Facebook is not only wildly profitable, with gross profit margins of 76%, and is growing fast (its revenue in the fourth quarter of 2013 was up 55% from the year-ago quarter). But is Facebook's current growth trajectory sustainable enough to enable the social network to live up to the market's robust expectations for the company? As the pioneer in monetizing a social network at mass scale, investors have no precedent to look to for guidance of just how sustainable Facebook's growth will be.

And the speculative storyline gets worse when you consider the social network's recent acquisitions.

Whatsapp

WhatsApp. Image source: WhatsApp.

Overpaying for speculative investments
Not only is the nature of the acquisitions themselves risky, but the prices Facebook is agreeing to pay are borderline absurd.

The first of Facebook's recent mind-boggling acquisitions came in February when the social network announced it would be acquiring WhatsApp, a multiplatform messaging service with an estimated $30 million in revenue in 2013, in a deal valued at $19 billion. Yes, the messaging service looks well on its way to eventually boast 1 billion monthly active users. But with no evidence (even in the form of bullish forward-looking estimates) that the platform can be monetized at levels that justify the $19 billion price tag, Facebook seems to have overpaid for the service.

Then Facebook dropped another surprise on investors last week when it announced it will be acquiring a maker of virtual reality goggles, Oculus VR, in a deal valued at $2 billion. Facebook CEO Mark Zuckerberg's proclamation that virtual reality may serve as a next-generation social platform and be a part of the daily lives of billions of people hasn't gone over well with investors.

So, what's the key takeaway for investors? Despite Facebook's lofty valuation and questionable acquisitions, its core social platform looks as strong as ever with plenty of growth ahead. While the risk profile for Facebook stock certainly seems incrementally worse, the future looks bright enough to make the stock worth holding onto. But for investors interested in initiating a position in the stock, waiting for a larger pullback makes even more sense today than it did a few months ago.

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Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Facebook, LinkedIn, and Twitter. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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