Catching Falling Knives amid Headline Risk $FB $AAPL $MSFT

Here we go again. Facebook’s stock has hit another pocket weakness and was down to $132/share as I write this piece (-5.5% on the day). New articles have been posted in the media about Facebook having a morale problem and there has been in-fighting and finger-pointing during this time of “chaos” in the company…

All of this sounds eerily familiar to an article entitled “Apple’s Employee Morale Problem”, published in 2013, another which pointed to its top execs leaving, published in 2012, or the plethora of articles written about how Apple can no longer innovate (published first in 2013 and again in 2015).

If you recall, these articles were being published at a time when it was not fun to be a shareholder of Apple. It was absolutely a falling knife and the headlines everyday were only negative. Although we have hindsight to help us, we now know what those headlines ended up being worthy of…

You can’t blame the media for publishing on large cap names that have been under selling pressure. If you own the stock, you’re definitely going to search around and see what the hell is going on. Is there something I am missing? “If key employees are leaving, how will the business stay on top?” Selling begets selling and articles get clicks.Apple

What I love about the stock market is that we can come back to real data in our analysis to see what is priced in. As of this writing, Facebook trades at 7.7x 2020e EBITDA… by comparison Microsoft trades at 13x. Apple trades at 9.1x. Visa, no question a good business, trades at 17.6x EBITDA… The S&P in aggregate trades at 12.6x LTM.

Facebook looks way too cheap me today, especially when you look at sales growing at 20%+ CAGR at least over the next 3 years (and they haven’t even truly monetized WhatsApp yet). The business also earns extremely high returns on capital, which supports the multiple. In other words, Facebook is worth more than the average S&P500 company…

I cant help but think this is another case of Apple. Can I say when the slide will stop? No. But I can look at the numbers to help realize the market is pricing in much worse case than I think will be the reality.

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