Stock Analysis & Ideas

Meta Platforms Stock: Highly Attractive Now after Falling

Rising interest rates amid the highest inflation levels in 40 years are certainly hitting growth stocks hard. For Meta Platforms (FB), this has meant a tremendous amount of near-term pain for its stock.

Of course, rather dismal earnings haven’t helped. Meta Platforms reported Q4 earnings on February 8 and missed the mark by a wide margin. The company’s share price lost more than a quarter of its value in a single day. This happened to be the largest single-day drop (in terms of market capitalization) in the stock market’s history.

This historic drop was driven by Facebook’s first-ever monthly active user decline in its history. Earnings per share missed the mark, and investors remain very wary of the company’s heavy transition into the metaverse.

This division posted an 11-digit loss, signaling the sheer amount of investment Meta Platforms is willing to put into this growth sector. Right now, investors seem unclear as to whether this is the space to be investing those funds.

Additionally, concerns around legal issues, headwinds around social media in general as the economy reopens, and other macro headwinds are plugging FB stock. There’s no shortage of headwinds for Meta right now, resulting in this high-flyer losing more than 40% of its value from its peak.

Right now, I’m bullish on Meta Platforms, and think this is an attractive level to accumulate. Here’s why I’m taking the opposite stance on this stock right now, relative to the overall market view.

There’s Something to the Metaverse

The Facebook name change and rebranding to Meta Platforms really ushered in a wave of interest around the metaverse and what this sector implies. The amount of interest was initially focused more on the positives of this space. Investors looking for more growth from what was Facebook now had a catalyst to rely on.

The newly rebranded Meta Platforms was set on a mission to revolutionize the metaverse. These digital worlds are only starting to catch on, with the company’s virtual reality headsets becoming a growing piece of the business. Of course, Meta’s Facebook division still drives the lion’s share of the company’s revenue and earnings. However, this is a high-growth sector with lots of upside. There’s a reason why investors are bullish on this space.

Facebook’s early entry into this market and the company’s VR technology positions Meta Platforms well to capture market share in the metaverse. How big this market will ultimately be, and whether these up-front investment dollars will be worth it, is a whole other story. That’s where many investors differ.

For metaverse bulls, this nascent space is one that’s likely worth the investment. A number of recently-launched blockchain-based Metaverse games have seen user counts increase 10x in a matter of months. For Meta Platforms, taking the metaverse mainstream and capturing billions of metaverse gamers is the key.

Now, competition is heating up in this space. Aside from crypto-related players, there are a number of other virtual reality companies vying for market share. Meta Platforms is one of many and will likely need to continue to spend heavily to grow this market and enhance the company’s early-mover advantage.

During its Q3 earnings release, the company said that it expects that the investment in Facebook Reality Labs will reduce its operating profit in 2021. The company will further increase its investment in the coming years.

The sheer scale of investment is hard to comprehend for many investors, given the current size of the opportunity. However, as with Facebook, Zuckerberg and his team seem to think this is a space worth targeting. With growth at the company’s legacy social media platform waning, there’s a need for another growth avenue to keep investors excited.

Investors Get the Metaverse for Free

The market has been trending in a bearish direction of late regarding Facebook’s future. Despite its impressive growth rate, this stock has been traditionally undervalued compared to its large-cap tech peers. This is likely because analysts believe that digital advertising may slow in the near future as the economy reopens.

However, after years of operation, nothing of that sort has happened. FB’s revenue grew by 35% in the most recent quarter to reach $29 billion. Further, its operating income also increased 30% to reach $10.4 billion.

Most of the revenue increase came from FB’s core advertising business. This suggests that this stock’s PE ratio of 15.7 does not consider growth from Oculus or FRL. Rather, the stock is being discounted on the basis of its current investment in the metaverse.

This would mean that investors can buy Meta stock today and essentially enjoy metaverse business for free. In addition to this, investors also have a highly-profitable business along with an attached VR headset brand at what looks like a very attractive valuation right now.

Wall Street’s Take

Turning to Wall Street, Meta Platforms is a Moderate Buy. Out of 44 analyst ratings, there are 32 Buy, 11 Hold, and one Sell recommendation. 

The average Meta Platforms price target of $332.14 implies 53.1% upside potential. Analyst price targets range from a high of $466 per share to a low of $225 per share.

Bottom Line

The metaverse is such a nascent space that it’s hard to say how profitable Meta Platforms’ investment will turn out to be. This uncertainty warrants what may be viewed as a fair discount on the company’s stock price of late. These recent macro headwinds certainly don’t provide for any sort of bullish sentiment in the market right now, furthering these concerns.

However, investors looking for large-cap tech stocks at a discount may want to consider FB stock. There are a growing number of value-conscious investors that are starting to consider this company’s valuation as too cheap to ignore. Over the long term, buying high-growth stocks at reasonable prices has proven to be a winning strategy. Accordingly, Meta Platforms is a company to take a hard look at right now.

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