Why You Should Buy Facebook While It's In Crisis
Large groups of people can turn into a mob when whipped into a fury by grandstanding politicians and hyperbolic headlines
Yesterday we saw the pitchforks come out for Facebook. Maybe new legislation will yet emerge. But since the odds of that are low, investors should take advantage of Facebook's roughly 9% drop since March 16 to buy.
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Facebook is Tony Mitchell's second-largest position. He first bought the stock for his Internet Fund in October of 2014 when it was trading at $77. In September and October of 2017, he sold his position at around $171. A few weeks ago, Tony started buying it back at about $155. He is up about 5% on his investment in the last few weeks, and it looks like he has effectively turned the madness of the crowd to his advantage.
Tony Mitchell manages an internet fund for Marketocracy. Over the past 17 years, his fund averaged 17.17% a year, more than triple the S&P 500's return of 5.57% over the same period. For the past 10 years, his fund has outperformed the #1 U.S. equity mutual fund.
It is hard for most investors to buy a stock while it is in a crisis. Our gut instinct tells us to avoid risky situations and wait for things to calm down. Facebook's stock is down because a lot of people are waiting to see how things turn out. When investors feel the crisis has passed, there will be a lot of buy orders. Here's why.
In spite of the headlines, the hearings, and the hashtags, it does not look like many users are leaving Facebook. A survey conducted by Deutsche Bank concluded that "just 1% of respondents were deactivating or deleting their accounts." If the survey is representative of Facebook's 2 billion users, then 20 million users might leave. This may seem like a big loss, but it means 99% of users are staying.
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Doug Clinton, the managing partner of Loup Ventures, estimates that each active user generates about $21 in profits for Facebook each year. The loss of 20 million users would therefore reduce Facebook's earnings by roughly $420 million. Facebook's pretax income last year was $20.5 billion. Does a 2% drop in pretax income justify a 9% loss of market value? I don't think so.
At the end of the day, the 20 million people who might leave Facebook are an attractive audience for politicians and journalists to cater to. But the stock has already dropped by more than would be justified if all 20 million closed their accounts. I think Tony Mitchell is right. Facebook is a buy.
Ken Kam, Contributor