Red-hot tech stocks fell off a cliff heading into the Labor Day weekend. Facebook (NASDAQ:FB) stock was no exception. FB stock dropped about 7% in a matter of days.
To be clear, this tech sell-off is nothing to worry about. It’s a totally natural and totally healthy valuation gut-check.
Tech stocks had simply come a long way over a short time. They had run into lofty valuation territory. Now, gravity has finally kicked in. They are coming back to Earth.
This sell-off will end, soon, because the fundamentals underlying tech stocks remain robust. That is, technology continues to disrupt every facet of our daily and professional lives, at an accelerated pace today because of Covid-19, and these companies’ influence, revenues and profits only project to keep going way higher over the next five to 10 years.
As they do, tech stocks will continue to rally.
In that big picture, recent weakness is just valuation noise. So buy the dip in tech stocks – but be selective, because not all tech stocks have plunged enough to warrant buying them just yet (many are still overvalued).
One of the best tech stocks to buy on this sell-off is FB stock.
The Big Picture Is Strong
The big picture fundamentals supporting Facebook stock remain very strong.
Facebook still owns four of the world’s most used social media and digital communication apps. All four of those apps still have more than a billion users. The entire ecosystem still more than 3 billion unique people.
The company’s ad business still has unparalleled reach, with unparalleled targeting capabilities. It’s still the best ad machine on the planet, and ad dollars are still flowing rapidly from the physical to the digital channel, with tons of runway left. Profit margins are still up above 30%.
In other words, Facebook is still a super high-quality growth company, with robust growth drivers, a huge moat, big margins and tons of visibility to sustaining enormous growth for many years to come.
To that end, this is still one of the best long-term growth stocks to buy and hold for the next five to 10 years.
The only thing that has changed is that the FB stock price today is now 7% lower than it was a week ago. If your favorite cereal went on sale at the grocery store for 7% off, would you buy it?
Instagram Reels Catalyst
For weeks, I’ve been touting Instagram Reels as a huge upside catalyst for FB stock over the next 12-plus months.
Today, I believe more than ever that Reels will indeed spark meaningful out-performance in Facebook stock deep into 2021.
The idea is pretty simple. Facebook is very good at playing copy-cat. The last time they did it – with Instagram Stories, which copied Snap (NYSE:SNAP) – the platform leveraged superior distribution (more users) and all-in-one app convenience to turn Instagram Stories into the biggest stories platform in the world. Facebook’s user growth accelerated. So did revenue growth. And FB stock soared on the back of multiple consecutive double-beat quarters.
This time around, Facebook is copying TikTok with Instagram Reels. Yet again, Facebook will leverage superior distribution and all-in-one app convenience to turn Instagram Reels into the biggest short-form video platform in the world.
Facebook’s user growth will accelerate. Revenue growth will, too. And FB stock will rocket higher on the back of multiple consecutive double-beat quarters.
Nothing about this catalyst has changed over the past week. If anything, the Reels catalyst has only gained momentum.
Facebook Stock Valuation is Attractive
Among large-cap, big-growth technology stocks, Facebook stock is the most attractively valued.
Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Nvidia (NASDAQ:NVDA) all trade at over 50x forward earnings. Facebook stock, by comparison, trades at just 35x forward earnings.
And that’s a depressed forward earnings base, because the ad industry has been hit harder than the e-commerce, streaming TV and GPU industries during the Covid-19 pandemic. If you look out at 2021 earnings, Facebook stock is trading at just 28x next year’s earnings.
That’s too cheap for a high-quality, high-margin, big-growth company like Facebook.
Indeed, my numbers say that FB stock is worth more than $300 today.
Bottom Line on FB Stock
Buy the dip in FB stock.
The big picture fundamentals remain rock solid. Instagram Reels gives this stock a huge upside catalyst over the next year. And the valuation is the most attractive in the blue-chip tech stock sector.
So, don’t over-complicate this one. Just buy the dip.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.