Back in mid December, I wrote the market brief talking about how tech is on sale, and asked the question if you should be buying at these levels. Specifically, about Facebook, I wrote the following:
Now, with that out of the way, it’s definitely a great time to buy these stocks. Recently I filtered through stock data and discovered that there are only four US non-energy companies that have a market cap of at least $100 billion and are growing revenues at 25% or more each year. They are Facebook (FB), Netflix (NFLX), Amazon (AMZN) and Salesforce.com (CRM).
This is a select group of companies achieving incredible levels of growth even at the large size of these companies. Note that of the names listed above, Facebook’s P/E ratio is the only one not at or near triple digits. To me, this shows just how beaten down Facebook has been due to bad press.
I personally like to buy stocks that have incredibly healthy businesses but have been beaten down by bad press. Facebook certainly falls into this camp. The recent company that I bought for similar reasons was Chipotle (CMG) after it was beaten down due to a series of food illness headlines. The stock has rebounded nicely from these lows.
One of my favorite positions is already documented here on this site: Netflix. But, Facebook is really attractive at current levels. Is there risk? Of course. The bad headlines seem to be coming every day for Facebook, but Facebook is also a popular punching bag for the press these days. It’s not clear how much of this is affecting the actual business (less than you’d think in my opinion).
Today, after Facebook reported record earnings last night, the stock is up about 12%. While trading in the $130’s during December, the stock is now approaching $170. While buying solid companies on dips can be a useful strategy from time to time, the bigger takeaway here is about negative press.
Facebook, probably more than any other company, in the last year or two has just been hammered by negative press. How many times does Zuck need to head to Capitol Hill to receive the ire of grandstanding politicians? I’m not here to defend or attack Facebook. I’m here to try to differentiate between bad press that is indicative of a deeper issue with the business and bad press that is nothing more than a convenient political/media narrative. To me, Facebook’s bad press is almost entirely in the latter camp.
And the earnings prove this out. Facebook is still making money hand over fist. Revenues grew 30%! For a company this large, that’s an astounding growth rate. The company earned $6.88 billion in the quarter.
Netflix is one of my favorite companies and investments, and it’s predicated upon a theory that they’ll be the winner in a winner-take-most global category. And with that comes massive profit potential. Well, look no further than Facebook to see what kind of profit potential that is when you are the leader in a winner-take-most category. Facebook is growing revenues as fast as Netflix, and unlike Netflix, they’re spitting out insane cash and earnings. What a business.
We’ll see if Netflix can get to the place where it’s driving as much profits as Facebook. No guarantee. For now, just be impressed with Facebook’s execution in the face of relentless media and political angst.