Facebook Lost $238 Billion in Market Cap in One Day

After reporting disappointing earnings and offering investors a more pessimistic outlook on future growth prospects, Facebook stock was absolutely slaughtered, dropping over 20% in after-hours trading last night, and now, at the time of writing this, is down 26.5% from where it was trading at the close of the markets yesterday.

Facebook stock is now trading $236 a share. Prior to the Covid Crash, it was trading at $222 a share, so essentially Facebook is back to where it was pre-Covid. The stock ran all the way up to $382 a share by September 2021, but now it is down over 38% from that peak.

Facebook’s market cap as of yesterday was $898 billion. Now it’s $660 billion. To put into perspective how big a loss this is for Facebook, it lost today in market value about the entire market capitalization of Nike.

This has many investors wondering if perhaps we are in the beginning stages of a market collapse, particularly in tech. Because if this can happen to Facebook, it can happen to any company.

When markets are euphoric and bubbly, investors tend to shrug off bad earnings reports and take the glass half-full approach. “Sure, it was a bad quarter, but they can rebound. Still a great company long-term.”

But when investor sentiment turns towards fear and pessimism, any bad news for a stock causes a mass exodus, relentless selling.

I believe something has changed in the market psychologically. Let me explain. When stocks are in a bubble, or a period of extravagant growth and extreme valuations, most market participants understand on some level that it’s a bubble. They know that every day they are invested in the markets is a risk. But their stocks are going up so much that it’s idiotic to cash out, especially when the trajectory of the market is still upward.

So, they stay invested, but have one foot out the door–they have their thumb on that eject button. They’re ready to bail at the slightest sign of weakness or a reversal in the trend. Thus, when a high-flyer like Facebook reports bad earnings, investors are quick to bail on the stock. “Okay, I’ve seen enough; the party is over. Time to cash out.”

They know valuations are extreme and that stocks are in a bubble, but they want to make money, so they stay invested until they catch the slightest whiff of that bubble bursting, and then boom, they’re gone.

That’s what I think is going on right now in the market.

The more important part of this psychological dynamic at work is that this is probably what pops the bubble. Investors who are determined to sell at the top and get out before the crash are the ones who start the wave of panic. Imagine being in a crowded movie theater. One person gets up and leaves, no big deal. Maybe he’s taking a leak. Another person gets up and leaves, still no big deal. But when 10 people get up and leave at once, you know there’s something wrong. You start thinking about leaving. Then the fire alarm goes off and everyone rushes to the exits at once.

That’s just my two cents here.

Look, people are going to say the market is “overreacting” to the bad news from Facebook. Maybe so.

After all, the stock is only trading at 17x earnings. It’s not overvalued or anything. And that’s fair.

But this is peak earnings right now. When the economy slows down, earnings will go down.

The main thing is, though: perhaps it’s not the -27% move that is the overreaction. Perhaps the true overreaction was the stock advancing over 160% between March 2020 and September 2021. Perhaps the true overreaction was investors pushing Facebook’s market cap up to over $900 billion, and the vicious selling the stock is undergoing right now is the proper reaction.

There’s a reason they call stock market selloffs “corrections.”

This is the thing that people get backwards about markets and bubbles: when stock bubbles pop and stocks plummet and you see eye-popping losses in the course of a single day, or a week (such as -27% in one day for Facebook, or -25% in a day for PayPal), that’s the market recognizing that the stock was ludicrously overvalued.

Now the only question is, when does everything else start getting hammered?

I keep track of about 700 stocks on a spreadsheet I have. It’s the 500 stocks in the S&P 500, plus a bunch of other ones. All in all, it’s about $45.7 trillion worth of stocks that I track. It’s a large percentage of the overall market. Eventually I want to get to the point where I have every stock on the market in my spreadsheet, but this will take a long time given that there are about 3,500 companies in the Wilshire 5000 index, which is comprised of every American stock.

However, the fact that I have all the biggest and most important companies on my sheet means that the stocks I’m missing tend to be the smaller and more obscure names–the ones that don’t really move the market on a day-to-day basis; the stocks on the “long tail”. According to Siblis Research, the total market capitalization of the US stock market was about $53 trillion at the end of 2021, with $42 trillion of that being represented by the 500 largest companies.

Those numbers are lower now after the selloff, but my spreadsheet’s $45.7 trillion number is up to date as it refreshes automatically (the wonders of Google Finance).

What my sheet shows me is that of the ~700 stocks I track, the average stock is down almost 22% from its 52-week high.

Meaning the average stock right now is in a bear market.

The top 25 companies in terms of market cap are down by an average of 14.4% right now.

It’s not good. Things are brutal out there.

Leave a Reply