The problem with growth stocks is they’re only good if they keep on growing. When they stop growing, they turn into risky investments. Just ask investors in one of the best growth stocks of all time: Facebook.
After 11 straight quarters of delivering knockout news, when it came to earnings at least, shares in the social networking website went into free fall a few weeks ago.
Indeed, a little over a month after the stock closed above US$200 for the first time, a fresh record high and way above the US$82 a share they were worth a few years ago, Facebook created real news when it posted the largest one-day dollar fall in United States history for a publicly listed company.
The shares plunged 20 per cent, putting it in bear market territory in just one session, in a move that wiped out almost US$120 billion from its market cap.
It’s always tough for investors to buy a stock while it’s in crisis, but that’s the challenge now facing investors who are looking to get exposure to the US tech sector, easily the standout performer of the past few years.
Growth stocks are always highly volatile, which means the more you invest, the more you can lose.
If you’re lucky, you can also win, so it’s important to work out how much you can afford to lose and what sort of percentage these growth stocks will represent in your portfolio.
No matter which way investors turned, when Facebook’s latest quarterly numbers were released, they were disappointed.
Revenue was lower than expected and the number of monthly active users was also lower than expected.
Unfortunately, the only numbers that went up were the 20,000 new employees, who will focus on privacy and cybersecurity measures, and total spending, which could reach US$32.7 billion this year, up from US$20.5 billion in 2017.
However, that means costs are up and growth stocks are allergic to costs. They don’t like them at all.
Furthermore, chief financial officer David Wehner said the company was now going to focus on “putting privacy first” and that strategy will also put the brakes on any future revenue growth.
The focus on privacy first is to help repair the damage caused by the Cambridge Analytica scandal earlier this year where Facebook was being used to spread fake news and propaganda.
Once investors digested the updated results, they were spooked by the slowing growth and promptly hit the sell order button.
It comes as reports filter through that senior Facebook executives, including chief executive Mark Zuckerberg, have been quick to sell shares worth almost US$4 billion whenever they could over the past few months.
That said, Zuckerberg still saw his wealth drop by around US$16 billion once investors had studied the latest numbers.
Kris Walesby is chief executive of ETF Securities.
