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Many Worries Weigh on Meta. But the Stock Is a Buy

The decline and fall of Meta Platforms (FB) stock this year has been nothing short of shocking.

Evercore ISI analyst Mark Mahaney calls it an “implosion,” this destruction of 35% of Meta’s value in just a month-and-a-half’s time. It’s almost as if investors fear Meta is on course to becoming “Yahoo! 3.0,” he says — but how realistic is that fear?

Mahaney attempts to trace the source of investors’ sudden skepticism about Facebook and its parent company, ultimately concluding that three main factors are at work.

1. ESG

In the wake of The Wall Street Journal’s multi-week “Facebook Files” series of investigative journalism pieces on Facebook, says Mahaney, Meta’s devotion to environmental, social, and governance concerns (“ESG” for short) “have clearly become more important to current and potential FB investors.”

Worries that Meta isn’t doing enough to keep bad actors off of its platforms, and that social media overuse may be damaging the mental health of teenagers, have “major investment funds [feeling] wary of investing in FB shares.” Left unaddressed, these concerns could diminish demand for Meta shares, and consequently depress the stock price.

2. Apple’s privacy changes

Apple famously changed its policy on privacy protection on iPhones and iPads last year, switching from an “opt-out” model to an “opt-in” model — where companies like Facebook are only able to track users’ activities across apps and websites if they specifically grant Facebook permission to do that.

The effect of this change is to make it harder to Facebook to target ads to users effectively, and this appears to have caused Facebook’s advertising revenue to fall short of estimates last year. Now, investors are worried that Facebook’s ad business may be “materially impaired” forever, diminishing the value of the stock.

3. TikTok

In its latest earnings report, Facebook named TikTok as “a major competitive risk for” Facebook no fewer than five separate times — and no wonder. By the end of 2021, notes Mahaney, “TikTok had surpassed Google and Facebook to become the world’s most popular Web domain.”

Simply put, the more time people spend on TikTok, the less time they should have to spend on Facebook, Instagram, or other Meta properties. Hence, the bigger TikTok gets, the worse the news will be for Meta.

All of the above are valid concerns, and Mahaney dismisses none of them. In particular, he states flat out that “we definitely view TikTok as a major competitive risk to Meta.” But he also points out that TikTok’s growth in “time share” has mainly come at the expense of YouTube — not Facebook or Instagram.

In any case, Meta is in the process of addressing all three of these concerns, says Mahaney, and when it succeeds in overcoming the threats, it will generate “faster Revenue/EPS growth than the market currently envisions.” This, in turn, will convince investors to pay a higher multiple to earnings than they’re currently paying — not 13 times earnings, but 20 times earnings.

Ultimately, Mahaney concludes that that “these three issues are more than priced into FB shares” at their present valuation of 13×2023 GAAP EPS estimates of $16.83, and that this constitutes a “trough” valuation on the shares. Within a year, Mahaney believes investors can count on Meta Platforms climbing to $350 a share — and delivering a 59% profit from current prices. Accordingly, he maintains his “outperform” rating on Meta. (To watch Mahaney’s track record, click here)

Overall, FB shares get a Moderate Buy rating from the analyst consensus on Wall Street. The stock has 44 recent reviews, breaking down to 32 Buys, 11 Holds, and a single Sell. The average price target here is $332.14, just below Mahaney’s objective. (See FB stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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