For the second day in a row, shares of Facebook (NASDAQ:FB) stock are down again. After fighting a rising tide to close trading down 5% on Monday, Facebook stock took another dive on Tuesday, first falling more than 5%, then clawing its way back to about a 2.9% loss as of 2:30 p.m. EST.
There’s no apparent reason for today’s decline — no analyst downgrades, no price target cuts on Wall Street, and no bad earnings (or other) news from Facebook itself. Rather, as Reuters reports today, what we seem to be seeing in the past two days of unexplained selling is “investors continu[ing] to pull money out of some Big Tech companies that have benefited most from the pandemic.”
Facebook certainly seems to fit that definition. In the early days of COVID-19, Facebook struggled with worries that while homebound consumers were spending plenty of time online, producers were reluctant to pay for advertising on social networks such as Facebook because no one was shopping.
This is no longer the case. Facebook sales grew a healthy 22% in the third quarter, and its profits were up 29%. The company’s stock, meanwhile, has performed admirably through the pandemic, and is now up 43% over the past 52 weeks.
Is that last fact reason enough to sell Facebook stock, now that Pfizer has found a coronavirus vaccine, and the beginning of the end of the pandemic is in sight? Opinions may differ, but I vote yes — and I’ll tell you why.
On the one hand, Facebook stock at 33.4 times trailing earnings isn’t the most expensive stock on the block. In fact, the P/E of the S&P 500 as a whole is currently 35.7. On the other hand, though, analysts who follow the stock forecast less than 18% long-term earnings growth for Facebook and, at that growth rate, the stock costs nearly twice what I’d think it should to qualify as a bargain.
Combine this with the fact that, at $19.2 billion in trailing free cash flow, versus $25.3 billion in reported net income (according to data from S&P Global Market Intelligence), Facebook stock is no longer nearly as cash-profitable as it appears to be when valued on its accounting earnings, and I fear Facebook stock has finally become too expensive to own.
For today, at least, it seems a lot of investors agree with me on that.