I’ve had a few people ask me, “What happened to Facebook?” By now everyone has heard that Facebook who recently changed their name to Meta, had their stock drop by $78 or about 24%. It wiped $200 billion of value away. What happened?!
Well there is a simple explanation and a more complex one. The simple version is that Facebook finally stopped growing, they had a net loss of about 1 million active users over the last quarter (in total they have about 1.9 billion). That’s generally bad news, and so the stock price dropped.
The more complex answer has to do with how people value stocks. Stocks are, at least historically, supposed to be valued based on the amount of cash they can generate for their investors. The more cash the higher the valuation. What investor’s really like to see is growth in those cash flows, if you are growing cash flows by 20% a year, in 10 years you will have 620% more cash flow than you do now!!! Compounded growth can be an incredible driver of value. So when most professional investors buy a stock they have a forecast of how much growth is going to occur each year, companies like Meta/Facebook have most of their value coming from far future cashflows. So what happens when your growth assumptions take a major hit, like when you stop growing active users? Your future expected cashflows also take a major hit and your stock value falls. What we saw was a major reevaluation of what kind of growth Facebook can have in the future.
Now the question for an investor is… Was the market right, or has it over reacted and now is assuming growth that is way lower than will actually happen? If so you buy the stock, if not you stay away!