Meta Platforms (FB), formerly Facebook, has been one of my favorite investments and bullish positions for a long time. I have consistently been keen on the company’s growing revenues and fortress balance sheet, including a $48 billion cash pile and $0 long-term debt.
The company’s latest Q4 results were quite strong, but management’s soft guidance for the company’s upcoming results, elevated Reality Labs spending, and competitive concerns regarding TikTok caused shares to plummet as soon as the report went out.
Following the stock’s post-earnings plunge, shares continued to trade lower against the course of the general market indices, indicating substantially weekend investor confidence in the stock.
While the current risks to Meta Platforms should definitely not be taken lightly, I encourage investors to take a look at the bigger picture. This includes seeing Facebook as a highly profitable industry leader, with the potential to have a sizeable market share in the Metaverse while the stock remains absurdly cheap.
The Issues
While Meta Platforms reported Q4 revenue growth of around 20% to $33.6 billion, the company’s outlook for Q1 2022 included projected revenues of $27 billion to $29 billion, implying growth of just 3% to 11% year-over-year. Management mentioned that the company’s growth is to be impacted by headwinds to both impression and price growth.
For impressions, the company expects challenges in both elevated competition for people’s time and a change in engagement within its apps towards video surfaces like Reels, which monetize at softer rates than Feed and Stories.
The company sees multiple gloomy factors on pricing due to lapping the period when iOS privacy updates weren’t in effect and lapping a period of inflated demand in the prior year.
Specifically, On Meta Platforms’ earnings call, CFO Dave Wehner suggested the company would face pricing hurdles driven by “modestly increasing ad targeting and measurement headwinds from the platform and regulatory changes.”
Reality Labs Spending
Meta Platforms shared its Reality Labs revenues for the first time ever, which contains its AR/VR/Metaverse businesses. The segment’s revenues amounted to $877 million during the quarter, suggesting growth of 22% year-over-year.
However, the company lost about $3.3 billion on this segment, a widened loss from $2.4 billion and $2.6 billion in Q2 and Q3, respectively. With the company literally burning tens of billions on an annualized basis, several concerns arise, including whether the Metaverse will ever produce enough revenues to make this a worthwhile investment – and that is assuming the segment will grow meaningfully in the medium term in the first place.
Growing Competition
For the first time, Meta is facing serious competition, specifically from TikTok, which is growing at an impressive pace. The platform is reported to have reached more than 1 billion MAUs in the prior year (including China) and more than 100 million MAUs in the U.S.
Hence Meta Platforms now has to compete harder for users’ time on social media, and TikTok’s ongoing success may reduce time spent on Facebook/Instagram, resulting in fewer impressions and, consequently, revenue growth declines in the coming years.
Wall Street’s Take
Turning to Wall Street, Meta Platforms has a Moderate Buy consensus rating, based on 32 Buys, 11 Holds, and one Sell assigned in the past three months. At $332.14, the average Meta Platforms stock price prediction implies 44.5% upside potential.
Conclusion
Meta Platforms’ latest results raised some concerning questions regarding the company’s long-term prospects. However, the company remains highly profitable, growing its operating income from $32.6 billion in 2020 to $46.7 million in 2021, while the stock appears to be incredibly cheap at a forward P/E of just around 18. Indeed, risks remain.
However, the potential rewards appear to be more significant than the stock’s current price levels, in my view. I remain bullish on Meta Platforms.
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