The recent tech selloff may have gone too far. And Facebook parent Meta Platforms' (META -0.52%) beaten-down valuation may help illustrate why. Consider this: Slower-growing Coca-Cola (KO 1.50%) and McDonald's (MCD -0.05%) have higher price-to-earnings ratios than Facebook. Today, Meta Platforms has a price-to-earnings ratio of 23.6, while Coca-Cola's and McDonald's are 29.7 and 27.0, respectively.
Sure, some tech stocks may have gotten ahead of themselves in 2020 and into the beginning of 2021. But the recent tech sell-off may have not only hit some stocks too hard but also beat down some companies' shares that were already trading at conservative valuations. Facebook stock is one of these securities that arguably went from undervalued to a straight-up bargain.
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Facebook versus Coca-Cola and McDonald's
Do Coca-Cola and McDonald's deserve to trade at higher valuation multiples than Facebook?
Based on the companies' recent growth rates, they do not. Facebook's third-quarter revenue rose 35% year over year. Meanwhile, Coca-Cola's third-quarter revenue increased 16% and McDonald's rose 14%.
What about the three companies' earnings prospects? Analysts, on average, expect Facebook's earnings per share to increase at an annualized compound growth rate of 21.4% over the next five years. The consensus forecast for McDonald's compound average annualized growth rate over this same period of 21.6% slightly beats Meta Platforms', but the forecast for Coca-Cola's earnings to grow 9.6% per annum is comparatively underwhelming.
Investors, of course, should also compare these companies' competitive advantages. Coca-Cola protects its profits with its sprawling global supply chain and the recognition of its brands. McDonald's franchise is well-known for speed and consistency, and the company's real estate portfolio helps it maintain a low cost structure, bolstering profitability. But Facebook's edge is arguably just as impressive, if not even more so. The company has one of the most powerful network effects in the world, with 3.58 billion monthly unique users across its family of apps -- Facebook, Messenger, Instagram, and WhatsApp. Even more impressive, it has 2.8 billion daily unique users. With so many people using Facebook, people all around the world can count on finding friends and family to interact with on the platform.
A cash-producing machine
Throwing a curveball for readers here, the point of this article is not to convince them that they should buy Meta Platforms stock. Instead, it's to be on the lookout during broader-market sell-offs to see if there are companies (like Meta Platforms) that have been caught up in the decline that may not be deserving of it.
Tech stocks are arguably still recovering from a bad rap from back in 1999 and 2000, when most of them actually deserved to be sold off during the dot-com bubble. Not only did many dot-com companies lack earnings, some even lacked revenue. But lots of tech companies these days are a different breed -- and Meta Platforms is a great example. The company is raking in nearly $36 billion in free cash flow on a trailing-12-month basis, easily justifying its $906 billion market capitalization. Furthermore, the company has so much cash that it's repurchasing its shares. It bought back more than $14 billion worth of its stock during quarter and announced a $50 billion increase to its share repurchase program.
So when investors are spooked and share prices are falling, investors shouldn't be afraid to get out there to see where declines may have gone too far. Chances are, not every tech company's stock that's been slammed recently deserves its beating.
