Is Facebook’s fall just a blip for tech stocks?

Facebook’s share price last Wednesday closed at an all-time high of $217.50 per share. By the close of trading the next day, however, it had fallen to $174.97.

This almost 19% drop was the biggest one-day loss in US market history in terms of the value it represented. Overall, $119 billion was wiped out of Facebook’s market capitalisation. That is more than the GDP of Morocco.

Investors were prompted into selling not just because the company’s revenue and user growth came in slightly below expectations, but because Facebook projected these growth rates to decline even further.

When a company is trading on multiples that demand sustained high growth, this kind of revelation can cause a significant derating – and that is exactly what happened. Yet, even after the correction Facebook is still trading on a price-to-earnings multiple of over 24 times (down from over 33). Its price-to-sales ratio is over 10.

In other words, the share is still priced for growth.

There is a lot of debate in the investment industry about whether these kinds of valuations are sustainable. Many will point to what happened to Facebook last week as exactly the risk that investors face in these companies: they only have to disappoint the market marginally for their share prices to be punished. Yet, even taking into account last week’s events, the FANG+ Index on the New York Stock Exchange has still out-performed the S&P 500 by 28% over the past year.

The argument many make is that the technology giants, in particular, and the industry more broadly, are riding a wave that isn’t slowing.

Kevin Williams from Bataleur Capital says technology is a secular growth story investors can’t ignore.

“If you look at the revenue growth in the technology space, it grows at multiples above global GDP growth,” he says.

“We think the valuations in the technology space in general are reasonable given the growth outlook, although obviously there are certain exceptions.”

Williams says there are now 3.6 billion internet users, which is more than half of the world’s population. In total, 30% of the people on the planet use social media. This is also growing at 7% per year, which is twice the global GDP growth rate.

The companies taking advantage of this growth in areas such as e-commerce, internet advertising, online payments, video streaming and cloud services.

In particular, those that have been able to leverage off existing client bases to spread their footprint into other markets have a significant advantage.

“The technology space is volatile because it’s such a fast growing area,” says Williams. “And because valuations of these companies in absolute terms are not cheap, there can be a lot of price movement in the underlying shares from time to time. But that doesn’t change the secular growth structure of this industry.”