Shares of Meta Platforms, Inc. (NASDAQ: FB) have taken a big hit over the last six months. In fact, the decline was so sharp that it has lost 50% or around US$500 billion of its market capitalisation since September last year to close at US$187.61 last Friday.
Here are some of the various factors that led to the decline of its share price:
- Big Technology regulation
- Negative press surrounding its whistleblower criticism
- Changes of Apple’s iOS privacy features, which affect Meta’s ability to monetize users’ data
- Rising competition from TikTok, Snapchat and Telegram
- Losing Russian business following the Russian invasion of Ukraine
The concern over Meta’s ability to generate growth in the long-term is also another concern as the company pivots into Mark Zuckerberg’s Metaverse vision.
While I think that the company has its challenges with the slowing growth in its user base, including the need to generate new revenue from its existing base and expand beyond advertising, the sharp decline in its share price makes Meta an appealing stock to look into.
Here are 3 reasons why investors should buy into Meta:
1) Meta is very cheap
While I know that cheap is not equivalent to good, I think this is the case for Meta. The company is trading at a trailing price-earnings (P/E) ratio of 13.6 times, which is lower than its sector median of 19 times and its 5-years average of around 30 times.
Most of the other big tech players are trading at the range of above 20 times while its closest competitor, Alphabet Inc. (NASDAQ: GOOG) is trading with a PE of 26 times.
Even if the earnings were to be affected by the changing landscape on social media platforms, the company is still considered very cheap given its leading position.
On top of that, with a cash balance of around US$48 billion, nearly 9% of the entire company’s market cap is entirely liquid.
At these valuations, Meta is just too cheap for investors to ignore.
2) Meta’s established platforms and track record
Source: Meta website
While the competition on the social media space will eat into Meta’s earnings, the company has very strong and established platforms in social media.
On the Facebook platform itself, there are about 1.9 billion daily active users (DAU) and 2.9 billion monthly active users (MAU). This means that 66% of Facebook’s MAU login to the platform daily, making Facebookthe most used online social media network globally.
Source: Meta’s Earnings Presentation Q4 2021
Even if the slowing user base is a concern, Meta still has a very strong track record.
When Facebook first went public about 10 years ago, many investors questioned the valuation of Facebook as well as its business model. In fact, the company was also faced with slowing revenue and membership growth at that time.
The company’s moat is not just in its technology but in the sheer size of its network.
Given its track record under Mark Zuckerberg, I believe that Meta will leverage on its network effect and cash-generating power from its core business to prepare for future growth and competition.
3) Metaverse is coming sooner than you think
I think that the combination of increasing Big Tech regulations, concerns over inflationary pressure and US Federal Reserve (Fed) rate hike, the reopening of international travel as well as rising geopolitical tension have taken away some of the spotlight on the Metaverse or the development of Virtual Reality, but if you have been following this area closely, it is coming sooner than you think.
While there are those who argue that the Metaverse will not take off given the reopening of international travel and the needs for human interaction, Meta’s Oculus Quest 2 has become the best-selling headset worldwide and the Quest Store has already surpassed US$1 billion in content revenue.
The company’s social VR platform, Horizon, has hit 300,000 users, a 10 times increase in three months despite the easing in movement restrictions recently.
While it is too early to call the winners in this space given the intense competition with other Big Tech, Meta has a head start.
Bear in mind that Meta, which was already in the negative press headlines for topics such as hate speech, has also invested extremely heavily in recent years on user safety and prevention of hate speech. This gives the company a competitive advantage in the future.
Meta is also getting ahead in the Metaverse competition as some employees from Microsoft Corporation (NASDAQ: MSFT) and Apple Inc. (NASDAQ: AAPL) are joining the Meta camp to push forward its Metaverse vision.
Microsoft has a team dedicated to its augmented reality project with its Microsoft Hololens, the vision of Metaverse under the Redmond company.
Be Greedy When Others Are Fearful
I am not one who advocates buying into companies that are faced with multiple headwinds, but the perfect storm has also created a buying opportunity. With a PE of just 13.6 times, I think it makes sense to buy into a company with a proven track record, strong core business with reliable cash inflows, strong fundamentals with ample cash as well as a multi-year growth trajectory with its expansion strategy.
The downside risks are there but as I scroll through my Facebook while having my lunch, I re-read the famous Warren Buffett’s quote:
“Be fearful when others are greedy and be greedy when others are fearful.”
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
