Source: PaxForex Premium Analytics Portal, Fundamental Insight
Facebook's parent company, Meta Platforms, reported Q3 earnings in late October, and shares fell more than 24% on the news. The stock is down 67% so far this year, much worse than the S&P 500's 17.5% decline over the same time period.
Investors were disappointed by a big drop in third-quarter earnings and the social media company's forecast of Q4 revenue decline amid weak advertising and rising costs in fiscal 2023.
The Reality Labs segment spends billions of dollars on research and development for the meta-universe and is currently falling short. These huge expenses are negatively impacting Meta's profitability, resulting in a 46% YoY drop in operating profit in Q3.
The picture is definitely not rosy, but the market seems to be underestimating the potential of the company's money machines, Facebook and Instagram, which still remain afloat. The stock's valuation is also too cheap to ignore.
With all this in mind, you might ask yourself, is Meta worth buying now? Let's try to figure that out.
At the end of Q3, about 3.71 billion people used at least one of the company's apps (Facebook, Instagram, or WhatsApp) at least once a month, up 4 percent from a year ago. Ad impressions were up 17% YoY in Q3. With an already large user base, it's encouraging that the company is increasing the number of users even during the current downturn.
Meta also reported an 18% drop in average price per ad, largely due to the company's growing focus on ads -- short-form videos on the Facebook platform -- which are monetized at a lower rate than Feed or Stories. However, the company expects further growth in demand for videos over the next 12 to 18 months, which will help neutralize this revenue decline factor.
Thanks to improvements in the artificial intelligence (AI) mechanism on which recommendations are based, videos are played 140 billion times a day on Facebook and Instagram, up 50 percent from six months ago. The company expects Reels to gradually wrest market share from TikTok in the short video format.
Meta is also focusing on monetizing WhatsApp and Messenger through click-to-messaging ads, which allow companies to directly connect with customers through WhatsApp, Instagram Direct, or Messenger. Although relatively new, these ads have become the company's fastest-growing advertising product with an annual turnover of $9 billion. With 2 billion daily users, advertising on WhatsApp still has significant growth potential.
Although Meta invests significant free cash flow in its Reality Labs segment, it still has a very strong balance sheet. At the end of the third quarter, the company had total cash of $41.8 billion and total debt of $26.5 billion.
Analysts expect Meta's revenue to grow 6.4 percent next year and adjusted earnings per share to fall 9.9 percent.
Meta stock is currently trading at a historically low 9.2 times earnings, which seems inexplicable given the company's strong positioning in social media.
Apple's privacy changes have made targeted advertising difficult. Meta also faces increasing competition from TikTok. However, the company is addressing these challenges by implementing artificial intelligence and machine learning to improve feature utilization across its various platforms.
Last week, Meta announced layoffs of 11,000 people or 13 percent of its workforce. While the mass layoffs are perceived as worrisome events, in the long run, they may prove to be a blessing in disguise for the company's shareholders. The move underscored the company's commitment to operational efficiency and profitability, even at the cost of bad press.
Meta's long-term prospects largely depend on the metaverse, a global market estimated to grow from $500 billion in 2020 to $800 billion in 2024. Since CEO Mark Zuckerberg owns 56% of the company's voting stock, investors don't see any significant slowdown in Meta's spending.
If Zuckerberg's vision comes to fruition, it will be a huge boost for the company. Meta is also working with several technology companies, including Microsoft, Adobe, and Accenture, to develop new opportunities for the metaverse.
Thus, despite many unfavorable factors, investors might consider buying a small position in this stock based on the company's solid core business, solid balance sheet, cheap valuation, and vision for the future.
As long as the price is above 103.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 116.67
- Take Profit 1: 124.00
- Take Profit 2: 137.00
Alternative scenario:
If the level of 103.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 103.00
- Take Profit 1: 94.00
- Take Profit 2: 84.00
