Source: PaxForex Premium Analytics Portal, Fundamental Insight
Meta Platforms is still one of the biggest names in the technology industry. Ever since the company shifted its focus to developing its meta-universe project, investors have been questioning the decision and turning down shares. Since the announcement of the name change on October 21, 2021, the share price has fallen by about 50%. The name change itself has little or nothing to do with the price drop. Investors are concerned about the company's performance, which has been rather dull.
The stock price has dropped so much that the valuation puts Meta in value investing territory, even though it is a growth company. But does this drop in Meta Platforms stock make it a great value play? Or is it just a trap that will bankrupt investors?
Value investors make money in the market by investing in stock they think are worth more than their current price. A whole range of stocks can be considered value investments-it's not limited to a single industry. A good starting point for finding securities is a company's valuation. In the case of Meta Platforms, the price-to-earnings ratio is much lower than its FAANG counterparts.
With 14 times earnings, Meta also trades at a notable discount to the S&P 500 (currently 22.6). This is an undervalued stock, even if you look at Meta through the prism of several decades.
Nevertheless, while the valuation is a starting point, it does not reveal the whole story. You have to study how the business is doing, and spoiler alert: not very well.
Meta reported some more disappointing results in the second quarter. Revenues were down 1% from a year ago, and operating margins fell from 43% last year to the current 29%. Meta attributed the drop in revenue to two aspects: a weak advertising environment and Apple's iOS privacy changes. While there is some truth in both factors, Alphabet, which derives most of its revenue from advertising, still increased its advertising revenue by 12% YoY in the second quarter.
Even comparing it to another social media company like Pinterest, whose revenue grew 9% in the second quarter, doesn't give Meta any space. It's very simple: Meta is struggling to attract advertisers, and that's a problem.
Meanwhile, Meta has spent heavily on its Reality Labs initiatives, which focus on augmented (AR) and virtual reality (VR), as well as the metaverse. Reality Labs generated $452 million in revenue in the second quarter but lost $2.8 billion in revenue.
On the positive side, the company's flagship app, Facebook, recorded its highest number of daily active users (DAUs) during the quarter. But that was offset by a drop in average revenue per user, which fell by $0.30 from $10.12 per user in Q2 2021.
These aren't great results, but remember, the stock is trading like the company is in significant decline.
It's easy to succumb to a negative view of Meta because the company practically writes a bearish scenario for the stock in every earnings report. But Meta invests heavily in innovative technology. Very few companies have resources like Meta's in AR and VR, and if one of these offerings takes off, Meta stock will likely regain its lost glory.
In addition, the company bought back $5 billion worth of stock in the second quarter and has the right to buy back another $24 billion. Since the buyback campaign began in January 2021, Meta has reduced the number of shares outstanding by about 6 percent. Although some of this amount is used to offset stock-based compensation, it still has a significant effect.
Meta Platforms has a flawless balance sheet and solid cash flow (even though margins are down). While there is currently no growth, once the economy comes out of its ad spending pause and Meta figures out how to collect meaningful data from its iOS users, it will return with renewed vigor.
Meta stock doesn't have much of a downside - the business disaster is already priced in. But on the other hand, if anything goes right for Meta, the stock should rebound a bit. This one-sided risk profile makes Meta a great candidate for value investing.
However, investors should keep in mind that if none of Meta's bets work out, investors may see virtually no return on their investment.
As long as the price is above 155.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 168.11
- Take Profit 1: 183.00
- Take Profit 2: 199.00
Alternative scenario:
If the level of 155.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 155.00
- Take Profit 1: 140.00
- Take Profit 2: 125.00
