Stock Analysis & Ideas

Meta Platforms (NASDAQ:META): Twitter’s Failures are Meta’s Successes

Story Highlights

Although Meta Platforms faces a crisis of confidence as it bleeds equity value this year, META stock may eventually regain its positive footing following Twitter’s various debacles.

At first glance, social media and internet technology stalwart Meta Platforms (NASDAQ:META) appears like a classic case of a falling knife. Just when you think circumstances couldn’t get any worse, they do. However, the severe headwinds impacting Twitter due to its numerous fiascos might help the company regain its footing. I am cautiously optimistic about META stock in the long term.

To be sure, Meta Platforms will not be a walk in the park, even for hardened contrarian speculators. On a year-to-date basis, META stock crumbled nearly 68%. In the trailing half-year period, shares slipped almost 44%. Among the many obstacles the underlying business faces are growing questions about its pivot toward the metaverse.

Specifically, Altimeter Capital Management LLC Chair and CEO Brad Gerstner penned an open letter to Meta, urging aggressive workforce reductions and slashing its capital expenditures by at least $5 billion annually. As well, Gerstner sharply criticized the tech firm’s “supersized and terrifying” expenses toward the development of the metaverse.

Still, the counterargument in favor of META stock centers on feasibility. Arguably, the underlying company doesn’t need to change its business. Its Facebook social media platform – which still commands a massive global footprint – offers plenty of relevance. Therefore, management needs to focus more on what works and less on what doesn’t.

Simultaneously, Twitter’s largely self-inflicted wounds since the Elon Musk takeover should augur well for META stock. As the platform continually becomes toxic, the core Facebook business can once again rise to the forefront.

Interestingly though, on TipRanks, META stock has a 2 out of 10 Smart Score rating. This indicates strong potential for the stock to underperform the broader market.

META Stock Benefits from “Free Speech” Run Amok

Prior to the Twitter takeover, Musk declared himself a free speech absolutist. Fundamentally, the entrepreneur doesn’t appear to recognize that other rights and privileges feature sensible restrictions; for instance, one cannot drive a hundred miles per hour down a residential street. Still, from an investment perspective, the issue focuses on advertiser sensibilities.

Late last month, TipRanks reporter Sheryl Sheth mentioned a disturbing trend. “Lebron James, The National Basketball Association star, has tweeted his concern about the nearly 500% surge in the use of the N-word as quoted by The Network Contagion Research Institute (NCRI).”

To be fair, Twitter responded that most of these incidents stem from inauthentic accounts. As well, Musk referenced efforts to remove hateful content. However, a recent article from The Guardian reported that Twitter failed to delete 99% of racist tweets aimed at footballers (soccer players) in the run-up to the World Cup.

Naturally, trolls in bad faith abused Twitter’s new free speech directive, disseminating all manners of bigoted content. While such actions might appeal to a narrow window of society, it’s not appealing to advertisers. As a result, META stock might benefit from the controversy as Facebook’s content moderation – while still messy – has not devolved into anarchy like Twitter’s.

That’s not to say that Meta won’t encounter challenges. The slowdown in digital advertising demand doesn’t just impact Facebook but the broader tech ecosystem. Nevertheless, enterprises still need to market their products and services to better ensure success. Thus, Facebook can capture the potential migration away from toxic Twitter.

Meta Platforms Offers Great Value

Another reason to stick with META stock over the long haul is the underlying value proposition. To paraphrase the legendary investor Warren Buffett, “be fearful when others are greedy and be greedy when others are fearful.”

For starters, Meta enjoys a relatively stable balance sheet. Primarily, the company features an Altman Z-Score (a solvency metric) of 5.31, reflecting very low bankruptcy risk. Also, its cash-to-debt ratio of 1.61x may not be that great compared to its history. However, it’s arguably a solid figure given the current macroeconomic circumstances.

However, Meta Platforms really comes to life regarding income-statement performance metrics. Its three-year revenue growth rate stands at 29.2%, beating 79% of its peers in the interactive media industry. On the bottom line, the company’s net margin pings at 24.41%, above nearly 87% of the competition. As well, its return on equity stands at 22.83%, reflecting a high-quality business.

Despite these standout attributes, Wall Street prices META stock at 10.8x its trailing-12-month (TTM) earnings. In contrast, the industry’s median price-earnings ratio is around 18x. Moreover, the company’s price-earnings-growth (PEG) ratio is 0.4x, favorably below the sector median of 1.1x.

Is META Stock a Buy, According to Analysts?

Turning to Wall Street, META stock has a Moderate Buy consensus rating based on 26 Buys, nine Holds, and three Sell ratings. The average META price target is $147.24, implying 34.5% upside potential.

Takeaway: Meta May Get a Reprieve from Twitter’s Failures

In most competitions, participants can either win directly through superior performances or by capitalizing on their opponent’s mistakes. Either way, the end result is the same: one entity wins, and the other goes home. With social media becoming a zero-sum game, META stock can eventually rise on Twitter’s self-inflicted own goals.

Disclosure

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