Facebook’s High Growth Continues But Stock Fails To Take Off

On the day after both Apple and Facebook announced earnings that both handily beat estimates and impressed analysts, Apple’s stock is up over 8% and yet Facebook’s stock struggles to stay in the black. I can only think of one reason: investors could be getting cautious about buying high P/E stocks like Facebook even if they show no signs of slowing down.

Facebook’s Earnings Should Thrill High Growth Investors

Last year there was doubt about the stock when word got out that teens were leaving Facebook. Other concerns have revolved around whether they would be able to figure out how to monetize mobile traffic and whether people would eventually just tire of the site and go elsewhere. But with yesterday’s earnings those worries should be put to rest as the company beat both revenue and profit estimates. Ad revenue continues to rise and with it the income Facebook takes in.

Facebook Ad Revenue

Mobile ad revenue, once a major concern, has also impressively increased. Mobile is steadily becoming the dominant way viewers are accessing Facebook and the Internet. A chart that any FB stock owner should love to look at shows just how successful they have been in this area:

Facebook mobile ad revenue
Both charts curtesy of The Motley Fool

Investors Are Not Buying

With a P/E ratio of over 100 even after these great earnings, many analysts still admit the stock is expensive. “Expensive” stocks can trade higher as they have in selective cases for years but investors have now been riding stocks like this for a long time (most notably AMZN, TWTR, LNKD, TSLA, and NFLX). With trader sentiment becoming more cautious as the market keeps testing new all time highs, it just might be that these high flyers are going to find it harder to rise in the near future. Taking profits now as these stocks falter is tempting to many, whether they are individual investors or fund managers. Take a look at Netflix’s chart below that shows all of the big $30 gain the stock enjoyed earlier in the week on good growth earnings has now been given back. Stock owners of Netflix have been quick to pocket gains even though the growth still seems to be there. 

NFLX Chart

Based on Facebook’s blowout numbers, the stock should be solidly in the positive in Thursday’s trading. But clearly, investors are not buying even though they couldn’t have asked for much more. Daily trading volume is going to be well over double the norm which is a whopping 68 million shares a day. So many people use Facebook on a daily basis that it is the one stock they know and understand and this led to many young investors to make it their first stock to ever own. New investors continue to ask how to buy stock in Facebook when they get interested in putting money in the market for the first time. 

Facebook’s Pricey Acquisitions Aren’t Helping

Buying WhatsApp for 19 billion dollars and Oculus VR for 2 billion hasn’t buoyed the stock and might be part of the problem. While Mark Zuckerberg might ultimately know what he is doing with those company buys, the consensus is that he overpaid for them as if he was using play money. Surely he could have gotten them for a much cheaper price and expensive acquisitions like this can come back to hurt you if they don’t pan out.  Right now it seems that investors are choosing to sit on the sidelines and not jump in so quickly as they might have done six months ago. The tension is palpable about market fears and the struggling economy both in this country and worldwide. Facebook stock may be a good bet for the future but investors are picking to go into Apple this week as it has a much stronger balance sheet and is perceived as a safer investment choice.