To learn why Facebook's stock is falling, look at sales

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CHAPEL HILL, N.C. (MarketWatch) -- Facebook's stock has slumped 10% since the company released a widely celebrated first-quarter earnings report a week ago.

What's going on? Why have investors become so disillusioned with an earnings report that was initially characterized as crushing estimates?

One reason may be Facebook's (FB) sky-high price-to-sales ratio (PSR), which stands at 15.9, according to FactSet. To put that in context, consider that the S&P 500's PSR is 2.5. The higher the PSR, the faster a company's sales must grow in order for its stock to merely stay even.

To be sure, it's entirely normal for companies when going public to have higher-than-average PSRs. And Internet companies tend to have higher PSRs than the broad market.

Still, it's a safe assumption that Facebook's PSR won't stay at current levels forever. It's already declined from 25.8 at the time of the IPO to its current 15.9. And it's a matter of simple math that, as a company's PSR declines, its sales must grow in order for its stock price top keep up.

How fast? We need to make two assumptions before applying that simple math. The first is how far Facebook's PSR will fall, and the second is how long it will take to do so.

To illustrate, let's assume that in three years -- the 5th anniversary of Facebook's IPO -- its PSR will be equal to that of the average stock in the S&P 1500 that falls in the Internet software and services sector. According to FactSet, that average currently stands at 4.3, higher than for the overall market but a lot lower than where Facebook is now.

If so, and in order for Facebook's stock in May 2017 to be merely where it is today, the company's trailing 12-month revenue at that point would need to be $32.8 billion -- versus $8.9 billion today. That's a very high hurdle for the company.

The consensus of Wall Street analysts who follow the company, for example, is that Facebook's trailing four-quarter revenue in three years will be just over $20 billion. Those analysts tend to be notoriously optimistic but, even so, their consensus is far short of clearing that high hurdle.

Of course, you can endlessly play around with the inputs to this simple sales-growth-based valuation model. And with optimistic growth-rate assumptions, you can support Facebook's current price.

Yet it's worth remembering that Facebook operates in an industry that is quite vulnerable to disruptive technology, which quickly destroys companies. As Jay Ritter, a University of Florida finance professor and an expert on the IPO market, put it to me earlier this week: "What if a superior platform comes along and suddenly there is a mass migration away from Facebook?"

Ritter acknowledged that there are very few precedents to which we can turn when assessing the likelihood of that happening to Facebook. But we know that if it does, the risks would be huge.