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?

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. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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