Lessons from Facebook's stumble

Thought of the day

by Chief Investment Office 26 Jul 2018

Facebook shares shed as much as USD 151bn in shareholder value in after-hours trade, following second-quarter results. The sell-off spilled over into other major tech names, as anxious investors reduced risk exposure to the broader tech sector.

We are neutral on the global tech sector, and maintain an equal weight within our global tactical asset allocations. Against a backdrop of elevated trade and regulatory risks, we believe the software industry will continue to prove more resilient than internet stocks.

But we see broader lessons for all investors from Facebook's fall: 

  • Fundamentals trump headlines. One might have thought that this quarter's Cambridge Analytica's scandal and introduction of GDPR might have had a bearing on Facebook's performance. But their impact was actually minimal. What we believe drove Facebook stock down was the more "mundane" fundamentals - prospects for growth, users and margins. Investors in all markets should remember this. Regardless of the noise and whether it stems from trade tensions, geopolitics or other factors, fundamentals – particularly earnings growth – are what we believe ultimately what drives stocks up and down. 
  • Trees don't grow to the sky. High growth rates can't continue into perpetuity. Once companies, or countries, grow large, it is harder for them to keep expanding at the same pace. Investors should be cautious about the risks to forecasts of rapid long-term growth, whether in a high-flying stock or an emerging market economy. 
  • High valuations create vulnerability. High valuations ultimately need to be justified by strong prospects, and so highly valued stocks or markets are inherently vulnerable. In January, after an impressive run by US equities, only a relatively small shock was needed to drive a correction. US equity valuations today are more reasonable thanks to strong earnings growth, but investors should remain watchful of valuations. 
  • Diversify widely. Single stocks are riskier than diversified portfolios. Facebook has declined by more than 4% in its daily share price 50 times since its IPO in 2012. The S&P 500 has seen just one in the same period, and global equities none. Well-diversified portfolios are one of the most effective way for investors to both protect and grow their wealth.

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