Source: PaxForex Premium Analytics Portal, Fundamental Insight
According to the market's reaction, the market is not thrilled with Meta Platforms' ambition to become the leader of the metaverse. Instead, the market would rather just let Facebook and Instagram platforms make money and reward shareholders. CEO and founder Mark Zuckerberg, however, has other ambitions.
Over the past six months, Meta stock has lost more than 40% after hitting an all-time high in September. Most of the fall, however, came after Meta reported fourth-quarter earnings on Feb. 2: a drop of more than 30% in less than a week. Meta is fully committed to the metaverse and will incur significant expenses, which will lead to a decline in profits, something that Wall Street cannot tolerate. Is this short-term pessimism a disguised blessing for long-term investors?
At first glance, Meta's quarterly results were mixed. Quarterly revenues rose 20% to $34 billion year-over-year, but costs and expenses rose even faster, 38% to $21 billion. Because of higher costs, operating margins fell from 46% in Q4 2021 to 37%. All of this was reflected in the bottom line, where Meta reported earnings per share (EPS) of $3.67, but analysts had expected $3.84.
Perhaps the most important metric investors paid attention to was Facebook's daily active users (DAU), which declined for the first time since the company went public. Facebook had 1.930 billion users worldwide in the third quarter, but that number dropped to 1.929 billion in the fourth quarter. While that's only a 0.5 percent loss, it could be a worrying signal. Complicating matters further, Mark Zuckerberg mentioned on the Meta conference call that the growth and popularity of TikTok were hurting business. For perspective, Zuckerberg mentioned TikTok five times during the conference call, while he mentioned Facebook and Instagram 11 times each.
Meta also revealed for the first time its Reality Labs segment, which includes hardware, software, and augmented (AR) and virtual reality (VR) content. The results weren't pretty. Reality Labs brought in $877 million in Q4 but lost $3.3 billion in the same time period. After introducing this segment, investors realized how much capital it would take to bring AR and VR technology to the masses.
The outlook for 2022 was also alarming. First-quarter earnings growth is expected to be only 3% to 11% -- not very attractive when many other major tech stocks are growing faster and with fewer obstacles in the way. The company's growth is affected by Apple's new iOS privacy changes, which Meta predicts will lead to a slight increase in ad targeting costs. In addition, currency exchange rates and stiff comparisons to previous years will create additional obstacles.
Meta will invest heavily in growth this year, as spending is expected to be between $90 billion and $95 billion, a 30 percent increase over 2021. Becoming the leader of the metaverse won't be cheap, but Meta Platforms is going all in.
If you expect instant success for your business and Meta Platforms stock, you should probably pass on the stock. If, however, you intend to invest for the long term - buy and hold great companies for at least three to five years - then Meta Platforms stock may be attractive.
Few other companies have the financial resources of Meta Platforms, and none of them are seeking to create a metaverse. If Meta can't do it, probably no one else can. If you believe in the meta world or AR and VR, Meta Platforms is a must-buy.
The market is in shock right now with Meta Platforms. Wall Street can only look one year into the future, and the outlook is not bright. As individual investors who don't report to management or clients, we can take a much broader view and assess Meta's plans for the future. With Meta, two scenarios are possible:
First, Meta Platforms launches a metaverse and is a huge success. Everyone who held the stock or bought it at low prices benefits from increased revenue and profitability. Although this is a best-case scenario for shareholders, the stock is priced as if it will never happen.
Second, the metaverse could be a disaster in which Meta burns through billions of dollars. While such an outcome would anger shareholders, the consequences would not be catastrophic. Meta could change its name to Facebook and close its Reality Labs division, but cut costs by more than $10 billion and increase net income by about 20 percent. The company could pay this money to shareholders in the form of dividends or share buybacks, but without its metaverse aspirations, Meta Platforms will return to the same business it was for the previous five years: the money printing machine.
The recent market sell-off looks like a great opportunity to buy stock, but only with the right time horizon. If you intend to own the stock for several years, consider buying on the downside. 
As long as the price is below 255.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 217.36
- Take Profit 1: 180.00
- Take Profit 2: 160.00
Alternative scenario:
If the level of 255.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 255.00
- Take Profit 1: 250.00
- Take Profit 2: 311.00
