Facebook (FB) was slammed Wednesday on news that it would spend $2 billion to purchase virtual reality startup Oculus. The company immediately lost $6 billion in market capitalization -- or, as Doug Kass pointed out, the equivalent of three Oculi.
Still, I like this deal, and I like Facebook for the long haul. Facebook is using mostly stock for the Oculus purchase, with only $400 million of the total to be paid in cash, so it's a relatively low-risk transaction. I also liked last month's WhatsApp deal, and the market seemed to concur, as Facebook marched to an all-time high soon afterward.
However, if you have a shorter time frame in mind, you may want to avoid Facebook. Oculus could turn out to be a great investment, but right now it doesn't really matter. What does matter is that Facebook is a high-valuation company: Shares are trading at about 100x this year's earnings, and at 37x next year's estimated earnings. That is exactly the type of stock you don't want to own right now, regardless of how you feel about this deal. It's better to own cheap tech stocks such as Microsoft (MSFT) and Cisco Systems (CSCO), as I've explained here.
Facebook took it on the chin yesterday, plunging below its 50-day moving average (blue) for the first time this year.
What about Facebook rival Twitter (TWTR)? I still think Twitter's potential is underestimated by the market, and I still love it in the long term, but I'm not going to hang on to it as it falls. Twitter is trading at more than 200x next year's earnings estimates, so based on current market trends it is going lower. I'll certainly buy it back when this phase has passed, but there is no point in hanging on when highly valued stocks are so clearly out of favor.
Again, though, I think the Oculus deal could work well for Facebook. Remember this mantra: Facebook wins by getting everyone on its platform and keeping them there. Via the WhatsApp acquisition, Facebook users will be able to contact just about anyone at any time. If Facebook can provide a unique, immersive gaming experience to go along with that, it gives people another reason to go there -- particularly young people.
Just as with the WhatsApp acquisition, Oculus seems aimed at the young users who've been losing interest in Facebook. Think of this from the perspective of a teenager, and you'll understand the appeal of both WhatsApp and Oculus. Adults might have a more difficult time understanding, because most of us don't spend our days chatting with friends and playing video games. But, with those two purchases, Facebook could solidify a position as the go-to website for young people around the world. Facebook is attempting to provide young people with the things they want the most in an attempt to get them on the platform and keep them there.