Source: PaxForex Premium Analytics Portal, Fundamental Insight
Tech giant Meta Platforms has lost more than half of its value in the past year. Part of that drop was due to rising interest rates and macroeconomic factors, but investors also seem to have lost faith in company's long-term growth. Should investors treat Meta as "dead money" or an undervalued reversal play? Let's look at both versions to make up our minds.
Pessimists are sure that Meta will continue to face headwinds for several reasons: Its advertising business encountrs existential issues, it intends to burn billions of dollars on its metaverse, and it will be under scrutiny from antitrust regulators for the anticipated future.
Meta's Facebook and Instagram are still the market leaders in digital advertising, but they've both suffered from Apple's privacy update for iOS -- which allowed users to disable data tracking features -- over the past 12 months. Without that data, Meta ads become much less convincing at attracting revenue-generating clicks.
While Apple has been tightening the screws on Meta, ByteDance's TikTok has overtaken Instagram and Snap Snapchat as the top social network for American teens, according to a recent Piper Sandler survey. TikTok surpassed one billion global users last year and overtook Meta and Snap in the fast-growing short video market. Meta is trying to catch up with Facebook Watch and Instagram Reels, but it may be too late to close this widening gap.
Even worse, inflation, a strong dollar, and other macroeconomic factors have forced many companies to cut their ad spending this year. All of these problems have powered Meta's ad revenue growth, which still accounted for 97% of its top line in the first half of 2022, to hit a brick wall.
But while Meta's ad sales dried up, the company continued to expand its Reality Labs division, which houses its VR headsets, AR smart glasses, and Horizon Worlds meta-universe.
Meta has reportedly delayed and withdrawn some Reality Labs projects to cut costs, but building a VR-based social platform remains one of Mark Zuckerberg's top priorities. Nevertheless, the company can no longer reliably fund the development of this unprofitable ecosystem with its more lucrative advertising revenue. That's why analysts predict Meta's revenue growth to be dull this year and profits to fall 28%.
As Meta's growth slows, the company faces tighter data-sharing rules and antitrust laws in Europe. In the U.S., the Federal Trade Commission (FTC) is also suing Meta and trying to force it to abandon Instagram and WhatsApp. These regulatory problems will probably hang over Meta for at least a few more years.
Meta clearly faces a lot of challenges in the short term, but the bulls note that 3.65 billion people used at least one of its apps each month in Q2 of 2022, up 4 percent from a year earlier. Meta's ability to continue to attract new users (even though it already reaches nearly half the world's population) implies that it will remain the default advertising platform for most companies.
Apple's iOS update may have slowed the company's growth shortly, but Meta is already trying to overcome these problems by collecting more first-party data and introducing more video ads. Bulls believe that once Meta implements these changes and macroeconomic factors subside, its advertising business will stabilize and start growing again.
As for the Reality Labs division, it has already created a benefit in the niche VR market. The Quest 2 has become the best-selling standalone VR headset in the world, with about 15 million units sold since its launch in October 2020, and the new Horizon Worlds platform earlier this year has already attracted 300,000 users. These numbers may seem tiny compared to the major social media platforms, but they could grow exponentially as more advanced hardware and software are developed over the next few years.
Yet, Meta stock trades at 15 times earnings estimates, making it the cheapest FAANG stock by a wide margin. If Meta can overcome its near-term problems, it could easily double its stock from current levels.
Meta is not done, but will likely remain out of favor until it stabilizes its core advertising business. Its stock looks cheap, but its lack of near-term catalysts would prevent it from being seen as a reversal play.
As long as the price is below 155.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 147.47
- Take Profit 1: 134.00
- Take Profit 2: 120.00
Alternative scenario:
If the level of 155.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 155.00
- Take Profit 1: 170.00
- Take Profit 2: 183.00
