If there were any lingering questions about volatility in the tech sector, they were answered with a resounding "yes" last week. Other than a brief midweek respite, Facebook (NASDAQ: FB ) shares got caught up in all the negativity and ended the week giving back most of their meager gains.
According to some, the reason behind the doom and gloom is that a correction is overdue, since the only thing supporting the market's performance the past year was the Fed's monetary policies. Tech stocks in particular have been battered, so say the bears, because the "artificial" nature of the market's run hits the highest-flying stocks -- like Facebook and its wannabe kin, Twitter (NYSE: TWTR ) -- the hardest.
Is the sell-off warranted?
The problem with broad sell-offs is that fundamentals go out the window. Some share-price drops -- like Twitter, for example -- are justified. The tweet king still has a market capitalization of over $23 billion after its momentous drop from the $70-a-share range, and there are fundamental reasons for its decline.
As the newbie on the publicly traded social-media block, Twitter has been valued based on the belief it can sustain its rapid pace of user growth and find new and better ways to monetize its service. Problem is, Twitter's user growth is slowing to a crawl, which is particularly disconcerting, considering how early it is in what should be a rapid growth phase. And don't expect things to improve anytime soon, based on Twitter's 2014 revenue guidance of $1.15 billion to $2 billion.
This year's revenues, assuming guidance is anywhere close, will be a vast improvement over Twitter's nearly $665 million in 2013. That's the good news. The bad news is that expected 2014 revenues still don't justify its stock price, by a long shot. Also, what kind of guidance is that, anyway? A range of nearly $1 billion gives the impression Twitter management simply doesn't know, and that's scary.
On the flip side of the broad tech sector sell-off is Facebook. Some investors were less than enamored with CEO Mark Zuckerberg's buying spree, and that's understandable. In a few weeks' time, Facebook dropped a whopping $19 billion on mobile message app WhatsApp, another $2 billion for virtual reality device manufacturer Oculus, and $20 million for drone maker, Ascenta. That's enough to give the most ardent of Facebook fans pause.
But its recent drop has less to do with its acquisitions as it does Facebook's industry. It's a tech stock, and tech stocks have enjoyed an artificial run-up thanks to the Federal Reserve, right? Lumping Facebook in with the likes of Twitter based on financials makes little to no sense at all, and that's why Facebook is such an intriguing opportunity right now.
Facebook in 2014
When Facebook announces Q1 2014 earnings on April 23, it will almost certainly show a year-over-year increase across the board. Revenues compared with 2013 will have improved, as will the number of users, and those accessing Facebook via mobile devices. But the real fun for investors will be the results of Facebook's current quarter.
Unlike Twitter, Facebook has a definitive plan of action to continue its rapid growth, and shareholders will see the fruits of Mark Zuckerberg's labors in Q2. With the more expensive video ads in full swing now, Facebook can grow revenues without having to inundate users with more and more ads.
Then there's Instagram, Facebook's $1 billion acquisition from a couple of years ago. Monetizing the fast-growing photo-sharing site begins in earnest this quarter, and the potential on Facebook's long-term revenues is undeniable. And a revenue-producing Instagram will be incremental to Facebook's top line, since it hadn't been monetized.
That little $20 million deal to bring drone-making in-house in support of Zuckerberg's Internet.org initiative could prove to be a hidden gem. In addition to bringing Internet connectivity to emerging markets around the world, what better way to grow Facebook's user base? More users will equate to more revenues, and drones could be the first step in addressing concerns about Facebook saturation.
Final Foolish thoughts
The decline in Twitter's share price makes perfect sense; it rode a wave of positive momentum to highs above $70 a share, leaving it with only one logical outcome: an inevitable dose of reality. Facebook, on the other hand, has a clear plan to continue its phenomenal growth. Now, with its recent drop in share price, Facebook isn't just a buy; it's an absolute steal.
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